Distribution of Cable Royalty Funds
| Published date | 12 February 2019 |
| Citation | 84 FR 3552 |
| Record Number | 2019-01544 |
| Section | Notices |
| Court | Copyright Royalty Board,Library Of Congress |
Federal Register, Volume 84 Issue 29 (Tuesday, February 12, 2019)
[Federal Register Volume 84, Number 29 (Tuesday, February 12, 2019)]
[Notices]
[Pages 3552-3611]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-01544]
[[Page 3551]]
Vol. 84
Tuesday,
No. 29
February 12, 2019
Part IILibrary of Congress-----------------------------------------------------------------------Copyright Royalty Board-----------------------------------------------------------------------Distribution of Cable Royalty Funds; Notice
Federal Register / Vol. 84 , No. 29 / Tuesday, February 12, 2019 /
Notices
[[Page 3552]]
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LIBRARY OF CONGRESS
Copyright Royalty Board
[Docket No. CONSOLIDATED 14-CRB-0010-CD (2010-2013)]
Distribution of Cable Royalty Funds
AGENCY: Copyright Royalty Board (CRB), Library of Congress.
ACTION: Final allocation determination.
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SUMMARY: The Copyright Royalty Judges announce the allocation of shares
of cable and satellite royalty funds for the years 2010, 2011, 2012,
and 2013 among six claimant groups.
ADDRESSES: The final distribution order is also published in eCRB at
https://app.crb.gov/.
Docket: For access to the docket to read background documents, go
to eCRB, the Copyright Royalty Board's electronic filing and case
management system, at https://app.crb.gov/and search for CONSOLIDATED
docket number 14-CRB-0010-CD (2010-2013). For older documents not yet
uploaded to eCRB, go to the agency website at https://www.crb.gov/or
contact the CRB Program Specialist.
FOR FURTHER INFORMATION CONTACT: Anita Blaine, CRB Program Specialist,
by phone at (202) 707-7658 or by email at crb@loc.gov.
SUPPLEMENTARY INFORMATION:
Final Determination of Royalty Allocation
The purpose of this proceeding is to determine the allocation of
shares of the 2010-2013 cable royalty funds among six claimant groups:
The Joint Sports Claimants, Commercial Television Claimants, Public
Television Claimants, Canadian Claimants Group, Settling Devotional
Claimants, and Program Suppliers.\1\ The parties have agreed to
settlements regarding the shares to be allocated to the Music Claimants
and National Public Radio (NPR). Public Television Claimants Proposed
Findings of Fact and Conclusions of Law (PFFCL) ] 1.
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\1\ The program categories at issue are as follows: Canadian
Claimants Group: All programs broadcast on Canadian television
stations, except (1) live telecasts of Major League Baseball,
National Hockey League, and U.S. college team sports and (2)
programs owned by U.S. Copyright owners; Joint Sports Claimants:
Live telecasts of professional and college team sports broadcast by
U.S. and Canadian television stations, except programming in the
Canadian Claimants category; Commercial Television Claimants:
Programs produced by or for a U.S. commercial television station and
broadcast only by that station during the calendar year in question,
except those listed in subpart (3) of the Program Suppliers
category; Public Television Claimants: All programs broadcast on
U.S. noncommercial educational television stations; Settling
Devotional Claimants: Syndicated programs of a primarily religious
theme, but not limited to programs produced by or for religious
institutions; and Program Suppliers: Syndicated series, specials,
and movies, except those included in the Devotional Claimants
category. Syndicated series and specials are defined as including
(1) programs licensed to and broadcast by at least one U.S.
commercial television station during the calendar year in question,
(2) programs produced by or for a broadcast station that are
broadcast by two or more U.S. television stations during the
calendar year in question, and (3) that are comprised predominantly
of syndicated elements, such as music videos, cartoons, ``PM
Magazine,'' and locally hosted movies. Public TV PFFCL at ] 4;
Notice of Participant Groups, Commencement of Voluntary Negotiation
Period (Allocation), and Scheduling Order, Docket No. 14-CRB-0010-
CD, at Ex. A (Nov. 25, 2015). The categories are mutually exclusive
and, in aggregate, comprehensive.
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Between 2012 and 2015, the Judges ordered partial distributions of
the 2010-2013 cable funds to the ``Phase I'' participants (including
Music Claimants and NPR) according to allocation percentages agreed
upon by the participants. Order Granting Phase I Claimants' Motion for
Partial Distribution of 2010 Cable Royalty Funds, Docket No. 2012-4 CRB
CD 2010 (Sept. 14, 2012), Order Granting Phase I Claimants' Motion for
Partial Distribution of 2011 Cable Royalty Funds, Docket No. 2012-9 CRB
CD 2011 (Mar. 13, 2013), Order Granting Motion of Phase I Claimants for
Partial Distribution, Docket No. 14-CRB-0007 CD (2010-12) (Dec. 23,
2014); Order Granting Motion of Phase I Claimants for Partial
Distribution, Docket No. 14-CRB-0010 CD (2013) (May 28, 2015).
In December 2016, the Judges ordered the final distribution of the
settled shares from the remaining funds to Music Claimants and National
Public Radio. Amended Order Granting Motion for Final Distribution of
2010-2013 Cable Royalty Funds to Music Claimants (Aug. 23, 2017); Order
Granting Motion for Final Distribution of 2010-2013 Cable Royalty Funds
to National Public Radio (Aug. 23, 2017). When the Judges ultimately
order the final distribution of the remaining 2010-13 cable royalty
funds, they will direct the Licensing Division of the Copyright Office
to adjust distributions to each participant to account for partial
distributions and to apply the allocation percentages determined
herein.
Based on the record in this proceeding, the Judges make the
following allocation of deposited royalties.\2\
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\2\ In reviewing responses to Program Suppliers' request for
rehearing, the Judges became aware of an error in the Initial
Determination. The Judges used an incorrect base figure in
calculating the royalty shares for 2012 and 2013. The Judges
detailed that correction in the Order on Rehearing. The corrected
values appear in this Final Determination.
Table 1--Royalty Allocations
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2010 (%) 2011 (%) 2012 (%) 2013 (%)
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Basic Fund:
Canadian Claimants.......................... 5.0 5.0 5.0 5.5
Commercial TV............................... 16.8 16.8 16.2 15.3
Devotional Programs......................... 4.0 5.5 5.5 4.3
Program Suppliers........................... 26.5 23.9 21.5 19.3
Public TV................................... 14.8 18.6 17.9 19.5
Sports...................................... 32.9 30.2 33.9 36.1
3.75% Fund:
Canadian Claimants.......................... 5.9 6.1 6.1 6.8
Commercial TV............................... 19.7 20.6 19.7 19.0
Devotional Programs......................... 4.7 6.8 6.7 5.3
Program Suppliers........................... 31.1 29.4 26.2 24.0
Public TV................................... 0.0 0.0 0.0 0.0
Sports...................................... 38.6 37.1 41.3 44.9
Syndex Fund:
Program Suppliers........................... 100 100 100 100
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[[Page 3553]]
Program Suppliers filed a timely request for rehearing on November
2, 2018 (Rehearing Request). The Judges issued their ruling on the
Rehearing Request on December 13, 2018 (Order on Rehearing), denying
rehearing on any basis asserted by Program Suppliers in the Rehearing
Request. The Initial Determination is, therefore, the Judges' Final
Determination in this proceeding.
I. Background
A. Legal Context
In 1976, Congress granted cable television operators a statutory
license to enable them to clear the copyrights to over-the-air
television and radio broadcast programming which they retransmit to
their subscribers. The license requires cable operators to submit semi-
annual royalty payments, along with accompanying statements of account,
to the Copyright Office for subsequent distribution to copyright owners
of the broadcast programming that those cable operators retransmit. See
17 U.S.C. 111(d)(1). To determine how the collected royalties are to be
distributed among the copyright owners filing claims for them, the
Copyright Royalty Judges (Judges) conduct a proceeding in accordance
with chapter 8 of the Copyright Act. This determination is the
culmination of one of those proceedings.\3\ Proceedings for determining
the distribution of the cable license royalties historically have been
conducted in two phases. In Phase I, the royalties were divided among
programming categories. The claimants to the royalties have previously
organized themselves into eight categories of programming retransmitted
by cable systems: Movies and syndicated television programming; sports
programming; commercial broadcast programming; religious broadcast
programming; noncommercial television broadcast programming; Canadian
broadcast programming; noncommercial radio broadcast programming; and
music contained on all broadcast programming. In Phase II, the
royalties allotted to each category at Phase I were subdivided among
the various copyright holders within that category.\4\ In the current
proceeding, the Judges broke with past practice by combining Phase I
and Phase II into a single proceeding in which the functions of
allocating funds between program categories and distributing funds
among claimants within those categories would proceed in parallel.\5\
This determination addresses the Allocation Phase for royalties
collected from cable operators for the years 2010, 2011, 2012 and 2013.
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\3\ Prior to enactment of the Copyright Royalty and Distribution
Reform Act of 2004, which established the Judges program, royalty
allocation determinations under the Section 111 license were made by
two other bodies. The first was the Copyright Royalty Tribunal,
which made distributions beginning with the 1978 royalty year, the
first year in which cable royalties were collected under the 1976
Copyright Act. Congress abolished the Tribunal in 1993 and replaced
it with the Copyright Arbitration Royalty Panel (``CARP'') system.
Under this regime, the Librarian of Congress appointed a CARP,
consisting of three arbitrators, which recommended to the Librarian
how the royalties should be allocated. Final distribution authority,
however, rested with the Librarian. The CARP system ended in 2004.
See Copyright Royalty Distribution and Reform Act of 2004, Public
Law 108-419, 118 Stat. 2341 (Nov. 30, 2004).
\4\ The Judges last adjudicated an allocation (Phase I)
determination for royalty years 2004-05. See Distribution of the
2004 and 2005 Cable Royalty Funds, Distribution Order, 75 FR 57063
(Sept. 17, 2010) (2004-05 Distribution Order). In the Phase I cable
proceeding relating to royalties deposited between 2000 and 2003,
the parties stipulated that the only unresolved issue would be the
Phase I share awarded to the Canadian Claimants Group. The remaining
balance would be awarded to the Settling Parties. See Distribution
of the 2000-2003 Cable Royalty Funds, Distribution Order, 75 FR
26798-99 (May 12, 2010) (2000-03 Distribution Order). The Judges
adopted the stipulation.
\5\ Second Reissued Order Granting In Part Allocation Phase
Parties' Motion to Dismiss Multigroup Claimants and Denying
Multigroup Claimants' Motion For Sanctions Against Allocation Phase
Parties, Docket No. 14-CRB-0010-CD (2010-13) (Apr. 25, 2018). The
Judges discontinued use of the terms Phase I and Phase II and use
the terms Allocation Phase and Distribution Phase instead. Id. at
n.4. This determination addresses the Allocation Phase of the
proceeding.
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The statutory cable license places cable systems into three classes
based upon the fees they receive from their subscribers for the
retransmission of over-the-air broadcast signals. Small- and medium-
sized systems pay a flat fee. See 17 U.S.C. 111(d)(1). Large cable
systems (``Form 3'' systems) \6\--whose royalty payments comprise the
lion's share of the royalties distributed in this proceeding--pay a
percentage of the gross receipts they receive from their subscribers
for each distant over-the-air broadcast station signal they
retransmit.\7\ The amount of royalties that a cable system must pay for
each broadcast station signal it retransmits depends upon how the
carriage of that signal would have been regulated by the Federal
Communications Commission (``FCC'') in 1976, the year in which the
current Copyright Act was enacted.
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\6\ ``Form 3'' cable systems, so named because they account to
the Copyright Office for retransmissions and royalties on ``Form
3.'' The Form 3 filing is required because they have semiannual
gross receipts in excess of $527,600. These systems must submit an
SA3 Long Form to the U.S. Copyright Office. They are the only
systems required to identify which of the stations they carry are
distant signals. Royalty payments from Form 3 systems accounted for
over 90% of the total royalties that cable systems paid during 2010-
2013. Corrected Testimony of Christopher J. Bennett ] 10 n.2
(Bennett CWDT).
\7\ The cable license is premised on the Congressional judgment
that large cable systems should only pay royalties for the distant
broadcast station signals that they retransmit to their subscribers
and not for the local broadcast station signals they provide.
However, cable systems that carry only local stations are still
required to submit a statement of account and pay a basic minimum
fee. See 2000-03 Distribution Order, 75 FR at 26,798 n.2.
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The royalty scheme for large cable systems employs a statutory
device known as the distant signal equivalent (DSE), which is defined
at 17 U.S.C. 111(f)(5). The cable systems, other than those paying the
minimum fee, pay royalties based upon the number of DSEs they
retransmit. The greater the number of DSEs a cable system retransmits
the larger its total royalty payment. The cable system pays these
royalties to the Copyright Office. These fees comprise the ``Basic
Fund.'' See 17 U.S.C. 111(d)(1)(B). In addition to the Basic Fund,
large cable systems also may be required to pay royalties into one of
two other funds that the Copyright Office maintains: The Syndex Fund
and the 3.75% Fund.
As noted above, the utilization of the cable license is linked with
how the FCC regulated the cable industry in 1976.\8\ FCC rules at the
time restricted the number of distant broadcast signals a cable system
was permitted to carry (``the distant signal carriage rules'').
National Cable Television Assoc., Inc. v. Copyright Royalty Tribunal,
724 F.2d 176, 180 (D.C. Cir. 1983). FCC rules also allowed local
broadcasters and copyright holders to require cable systems to delete
(or blackout) syndicated programming from imported signals if the local
station had purchased exclusive rights to the programming (``syndicated
exclusivity'' or ``syndex'' rules). Id. at 187. In 1980, the FCC
repealed both sets of rules. Id. at 181.
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\8\ FCC regulation of the cable industry was impacted by passage
of the 1976 Copyright Act that created the compulsory license for
cable retransmissions codified in section 111. See Report and Order,
Docket Nos. 20988 & 21284, 79 F.C.C. 663 (1980), aff'd sub nom.
Malrite T.V., v. FCC, 652 F.2d 1140, 1146 (2d Cir. 1981).
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The Copyright Royalty Tribunal (CRT) initiated a cable rate
adjustment proceeding to compensate copyright owners for royalties lost
as a result of the FCC's repeal of the rules. Adjustment of the Royalty
Rate for Cable Systems; Federal Communications Commission's
Deregulation of the Cable Industry, Docket No. CRT 81-2, 47 FR 52146
(Nov. 19, 1982). The CRT adopted two new rates applicable to large
cable systems making section 111 royalty
[[Page 3554]]
payments. The first, to compensate for repeal of the distant signal
carriage rules, was a 3.75% surcharge of a large cable system's gross
receipts for each distant signal the carriage of which would not have
been permitted under the FCC's distant signal carriage rules. Royalties
paid at the 3.75% rate--sometimes referred to by the cable industry as
the ``penalty fee''--are accounted for by the Copyright Office in the
``3.75% Fund,'' which is separate from royalties kept in the Basic
Fund. See id.; see also 17 U.S.C. 111(d); 37 CFR, part 387.The second
rate the CRT adopted, to compensate for the FCC's repeal of its
syndicated exclusivity rules, is known as the ``syndex surcharge.''
Large cable operators were required to pay this additional fee for
carrying signals that were or would have been subject to the FCC's
syndex rules. Syndex Fund fees are accounted for separately from
royalties paid into the Basic Fund.\9\
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\9\ In 1989, in response to changes in the cable television
industry and passage of the Satellite Home Viewer Act of 1988, the
FCC reinstated syndicated exclusivity rules. The reinstated rules
differed from the original syndex rules, giving rise to a petition
to the CRT for adjustment or elimination of the syndex surcharge.
See Final Rule, Adjustment of the Syndicated Exclusivity Surcharge,
Docket No. 89-5-CRA, 55 FR 33604 (Aug. 16, 1990).
The CRT held that the syndicated exclusivity surcharge paid by
Form 3 cable systems in the top 100 television markets is
eliminated, except for those instances when a cable system is
importing a distant commercial VHF station which places a predicted
Grade B contour, as defined by FCC rules, over the cable system, and
the station is not ``significantly viewed'' or otherwise exempt from
the syndicated exclusivity rules in effect as of June 24, 1981. In
such cases, the syndicated exclusivity surcharge shall continue to
be paid at the same level as before. Id.
See Final Rule, 54 FR 12,913 (Mar. 29, 1989), aff'd sub nom.
United Video, Inc. v. FCC, 890 F.2d 1173 (D.C. Cir. 1989); 47 CFR
73.658(m)(2) (1989); 47 CFR 76.156 (1989). The present proceeding
deals only with allocation of those royalties among copyright owners
in the various program categories.
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Royalties in the three funds--Basic, 3.75%, and Syndex--are the
royalties to be distributed to copyright owners of non-network
broadcast programming in a Section 111 cable license distribution
proceeding. See 37 CFR, part 387.\10\
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\10\ The CRB last adjusted cable Basic, 3.75%, and Syndex rates
in 2016, for the period January 1, 2015, through December 31, 2019.
See Final Rule, Adjustment of Royalty Fees for Cable Compulsory
License, Docket No. 15-CRB-0010-CA, 81 FR 62,812 (Sept. 13, 2016).
This adjustment was pursuant to a negotiated agreement.
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Cable system operators are required to file Statements of Account
with the Copyright Office detailing subscription revenues and specific
television signals they retransmit distantly, and to deposit section
111 royalties calculated according to the reported figures. Ex. 2004,
Testimony of Gregory S. Crawford ] 74 & n.37. As cable system operators
merged they created contiguous cable systems that were required to file
consolidated Statements of Account. The consolidated systems were
required to pay royalties calculated on the aggregate subscription
income of the corporate operator, even though not all the systems under
the corporate umbrella, not even the contiguous systems, carried or
retransmitted compensable distant signals.
Between the time of the last adjudicated cable royalty allocation
proceeding and the present proceeding, Congress passed the Satellite
Television and Localism Act of 2010 (STELA).\11\ Before STELA, cable
operators were required to pay for the carriage of distant signals on a
system-wide basis, even though each signal was not made available to
every subscriber in the cable system. U.S. Copyright Office, Frequently
Asked Questions on the Satellite Television Extension and Localism Act
of 2010. Distant broadcast signals that subscribers could not receive
were called ``phantom signals.'' Id. STELA addressed the phantom-signal
issue by amending section 111(d)(1) of the Copyright Act, which details
the method by which cable operators can calculate royalties on a
community-by-community or subscriber-group basis. Id. From the 2010/1
accounting period and all periods thereafter, cable operators have been
required to pay royalties based upon where a distant broadcast signal
is offered rather than on a system-wide basis.\12\ Id. As discussed
below, this statutory change permitted the participants to analyze
relative value at the subscriber-group level. See, e.g., Corrected
Written Direct Testimony of Gregory Crawford, Ex. 2004 (Crawford CWDT)
] 66.
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\11\ Public Law 111-175, 124 Stat. 1218 (May 27, 2010),
reauthorized by Public Law 113-200, 128 Stat. 2059 (Dec. 4, 2014),
\12\ CSOs continue to be liable to pay a ``minimum fee'' for
systems that do not retransmit distant signals. See 17 U.S.C.
111(d)(1)(B)(i). Calculation of royalties at subscriber group levels
segregates minimum fee systems from systems that pay royalties based
on retransmission of distant signals in excess of one DSE.
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B. Posture of the Current Proceeding
In December 2014, the Copyright Royalty Board (CRB) published
notice in the Federal Register announcing commencement of proceedings
and seeking Petitions to Participate to determine distribution of 2010,
2011, and 2012 royalties under the cable and satellite licenses.\13\ On
June 5, 2015, the CRB published a notice in the Federal Register
announcing commencement of a proceeding to determine distribution of
2013 royalties deposited with the Copyright Office under the cable
license and the satellite license.\14\ The Judges determined that
controversies existed with respect to distribution of the cable (and
satellite) retransmission royalties deposited for 2013, and directed
interested parties to file Petitions to Participate.\15\ On September
9, 2015, the Judges consolidated the proceedings regarding the cable
license for the years 2010, 2011, 2012, and 2013. See Notice of
Participants, Notice of Consolidation, and Order for Preliminary Action
to Address Categories of Claims.
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\13\ Docket Nos. 14-CRB-0007-CD (2010-12) and 14-CRB-0008-SD
(2010-12), 79 FR 76396 (Dec. 22, 2014). The CRB received Petitions
to Participate from: ASCAP/BMI (joint), Canadian Claimants, Major
League Soccer, PBS for Public Television Claimants, Certain
Devotional Claimants aka certain Devotional Claimants or Settling
Devotional Claimants (SDC), Joint Sports Claimants, MPAA for Program
Suppliers, Multigroup Claimants, NAB for Commercial Television
Claimants, NPR, SESAC, and Spanish Language Producers. Major League
Soccer subsequently withdrew its petition to participate.
\14\ Docket Nos. 14-CRB-0010-CD (2013) and 14-CRB-0011-SD
(2013), 80 FR 32182 (June 5, 2015).
\15\ The Judges received petitions from: ASCAP/BMI (joint),
Canadian Claimants, SDC, Joint Sports Claimants, Major League
Soccer, MPAA for Program Suppliers, Multigroup Claimants, NAB for
Commercial Television Claimants, NPR, Professional Bull Riders, PBS
for Public Television Claimants, SESAC, and Spanish Language
Producers. Professional Bull Riders and Major League Soccer
subsequently withdrew their Petitions to Participate. Major League
Soccer withdrew its Petition to Participate in the Joint Sports
Category for 2010-2013 but maintained its 2013 satellite and cable
claims in the Program Suppliers category and indicated it would be
represented by MPAA. Major League Soccer LLC Withdrawal of Certain
Claims Relating to the Distribution of the 2010-2013 Cable and
Satellite Royalty Funds (Sept. 21, 2016). Multigroup Claimants,
which had sought to participate in the Allocation and Distribution
phases of the proceeding failed to file a written direct statement
in the Allocation Phase and was dismissed from participating in that
phase of the proceeding. [Second Reissued] Order Granting in Part
Allocation Phase Parties' Motion to Dismiss Multigroup Claimants and
Denying Multigroup Claimants' Motion for Sanctions Against
Allocation Phase Parties (April 25, 2018).
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On November 25, 2015, the Judges issued a Notice of Participant
Groups, Commencement of Voluntary Negotiation Period (Allocation), and
Scheduling Order, in which the Judges identified eight categories of
claimants for the proceeding: (1) Canadian Claimants, (2) Commercial
Television Claimants; (3) Devotional Claimants, (4) Joint Sports
Claimants, (5) Music Claimants, (6) National Public Radio, (7) Program
Suppliers, and (8) Public Television Claimants. National Public Radio
and Music Claimants reached settlements with the other claimants groups
and received respective final distributions. Order Granting Motion for
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Final Distribution of 2010-2013 Cable Royalty Funds to Music Claimants
(Aug. 11, 2017) and Order Granting Motion for Final Distribution of
2010-2013 Cable Royalty Funds to National Public Radio (Aug. 23, 2017).
With the settlement of the Music Claimants' share, only the Program
Suppliers claimant group has an interest in the royalties in the Syndex
Fund. Program Suppliers Proposed Conclusions of Law ] 2 & n.3 and
references cited therein. Public TV Claimants claim a share only of the
Basic Fund. Public TV PFFCL ] 43.
The hearing in the present proceeding commenced on February 14,
2018, and concluded on March 19, 2018.\16\ During that period, the
Judges heard live testimony from 23 witnesses and admitted written and
designated testimony from a number of additional witnesses. The Judges
admitted into the record more than 200 exhibits. Participants made
closing arguments on April 24, 2018, after which time the Judges closed
the record.
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\16\ The Judges also held a hearing on June 15, 2016, to address
concerns the parties raised about changes to the historical
bifurcation of proceedings into a first and a second phase.
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After reviewing the record, the Judges identified a controversy
among the parties relating to the allocation of royalties held in the
3.75% Fund and requested additional briefing from the parties. Order
Soliciting Further Briefing (June 29, 2018) (3.75% Order). Responding
to the Judges' order, the parties submitted additional briefs and
responses to address the issue framed by the Judges:
Whether the interrelationship between and among the Basic Fund,
the 3.75% Fund, and the Syndex Fund affects the allocations within
the Basic Fund, if at all, and, if so, how that affect should be
calculated and quantified.
Id. The Judges' disposition of the 3.75% Fund and Syndex Fund issues is
set forth at section VII, infra. The allocation described in Table 1 of
this Determination incorporates the Judges' resolution of this issue.
C. Allocation Standard
Congress did not establish a statutory standard in section 111 for
the Judges (or their predecessors) to apply when allocating royalties
among copyright owners or categories of copyright owners. However,
through determinations by the Judges and their predecessors (the
Copyright Royalty Tribunal, the CARPs, and the Librarian of Congress),
the allocation standard has evolved, and the present standard is one of
``relative marketplace value.'' \17\ See Distribution Order, 75 FR
57063, 57065 (Sept. 17, 2010) (2004-05 Distribution Order).
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\17\ In this proceeding, the Judges distinguish between
``relative values'' (to describe the allocation shares), and
absolute ``fair market values.'' Because the royalties at issue in
this proceeding are regulated and not derived from any actual market
transactions, they do not correspond with absolute dollar royalties
that would be generated in a market and thus would not reflect
absolute ``fair market value.''
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``Relative marketplace values'' in these proceedings have been
defined as valuations that ``simulate [relative] market valuations as
if no compulsory license existed.'' 1998-99 Librarian Order, 69 FR at
3608. Because such a market does not exist (having been supplanted by
the regulatory structure), the Judges are required to construct a
``hypothetical market'' that generates the relative values that
approximate those that would arise in an unregulated market. 2004-05
Distribution Order, 75 FR at 57065; see also Program Suppliers v.
Librarian of Congress, 409 F.3d 395, 401-02 (D.C. Cir. 2001) (``[I]t
makes perfect sense to compensate copyright owners by awarding them
what they would have gotten relative to other owners . . . .'').
In the present proceeding, the parties disagree as to the
appropriate specification of the sellers in the hypothetical market.
Program Suppliers assert that the hypothetical sellers are the owners
of the copyrights in the retransmitted programs. See Corrected Written
Rebuttal Testimony of Jeffrey S. Gray, Trial Ex. 6037, ] 11 (Gray
CWRT). Other parties assert that the sellers are the local stations
offering for licensing the entire bundle of programs on the
retransmitted signal. See Corrected Written Direct Testimony of Gregory
S. Crawford, Trial Ex. 2004, ] 45 (Crawford CWDT) and Corrected Written
Direct Testimony of Lisa George, Trial Ex. 4005, at 8 (George CWDT).
After considering the record and arguments in this proceeding, the
Judges find that, from an economic perspective, this is a disagreement
without a difference, and therefore, consistent with prior rulings,
identify the local stations as the hypothetical sellers. If the
hypothetical sellers (licensors) were assumed to be the owners of the
individual programs (instead of the local stations), then (as a matter
of elementary economics) they, like any sellers, would attempt to
maximize the royalties they receive from licensing the retransmission
rights to CSOs.\18\ Because the CSOs are assumed to be the buyers
(licensees), they would each negotiate one-to-one with owners of the
program copyrights. The corollary to the assumption that the
hypothetical sellers are the individual program copyright owners is the
assumption that the CSOs, as buyers, would need to create one or more
new channels to bundle these programs for retransmission. That raises
the economically important question of whether the transaction costs
\19\ that a CSO would incur to negotiate separate contracts with
individual copyright owners would be so prohibitive as to preclude one-
to-one negotiations from going forward. Transaction costs are
relatively ubiquitous in the licensing of copyrighted products to
licensees, resulting in the creation of a collective to represent the
licensees, and in blanket or standardized licenses to reduce
transaction costs further. See Watt, supra note 19, at 17, 164-67.
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\18\ Because the programs already exist, production costs have
been ``sunk,'' and the copyright owners incur no marginal physical
cost in the retransmission of their programs. Thus, the copyright
owners would seek only to maximize marginal revenue (but would still
consider marginal ``opportunity cost'' if applicable, e.g., if
retransmission would cannibalize their profits from local
broadcasting of the identical program or another program owned by
the copyright owner). In a more dynamic long-run model, copyright
owners might consider even the costs of production to be variable
and would then also seek to recover an appropriate portion of
production costs from retransmission royalties, thereby maximizing
long-term profits (rather than only shorter-term revenue), with
respect to retransmission royalties. However, because
retransmissions of local broadcasts are ``only a very small fraction
of a typical CSO's programming budget,'' it is unlikely that, in the
hypothetical market, owners of copyrights to the retransmitted
programs would have the market power to compel CSOs to contribute to
the long-run program production costs. See Rebuttal Testimony of Sue
Ann R. Hamilton, Trial Ex. 6009, at 14 (Hamilton WRT). Thus, the
Judges agree with the pronouncement in prior determinations that the
royalties that would be paid in the hypothetical market would
essentially be a function only of the CSOs' demand and the copyright
owners' costs, and their supply curves (if any) would not be
important determinants of the market-based royalty. See, e.g.,
Distribution of 1998 and 1999 Cable Royalty Funds, Final Order, 69
FR 3606, 3608 (Jan. 26, 2004) (1998-99 Librarian Order).
\19\ Transaction costs are ``pure reductions in the total amount
of resources to be distributed that are necessary to achieve and
maintain any given allocation.'' Richard Watt, Copyright and
Economic Theory at 15 (2000).
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But in the present case, a ``collective'' of sorts already exists--
the broadcaster who bundles programs for transmission within a single
signal. Therefore, it remains reasonable to consider the local stations
that have bundled the programs into their respective signals to be the
hypothetical sellers.
As noted supra, the values of the programs in the several
categories that are determined in this proceeding are ``relative
values,'' i.e., values relative to each other, from the perspective of
the CSOs, when the programs from these different categories are offered
for
[[Page 3556]]
distant retransmission in the form of bundles from local stations.
Relative value is based on the preferences of the CSOs (derived from
those of their subscribers). Because relative preferences are
components of market demand, the CSOs' choices represent important
elements of a market transaction. See generally P. Krugman & R. Wells,
Microeconomics, 284-85 (2d ed. 2009) (relative ``preferences'' lead to
buyers' ``choices'' and an ``optimal consumption bundle''); A.
Schotter, Microeconomics: A Modern Approach (2009) (revealed
``preferences'' allow for an analysis of how buyers ``behave in
markets,'' and those preferences are building blocks for ``individual
and market demand''). Thus, any methodology based on the identification
of the relative preferences and values of CSOs is indeed a market-based
approach to the allocation of royalties in this proceeding.
Because the pricing of the licenses is regulated, however, it is
not possible to identify the actual royalties that would be established
by these ranked preferences. To identify such royalties would require
an application of game theoretic/bargaining power considerations and
the extent and allocation of costs attributable to the licensed
programs--facts that are not in the record and likely are not
reasonably or accurately ascertainable.\20\ Nonetheless, the raison
d'[ecirc]tre of this section 111 proceeding is to allocate royalties
that have already been paid in a manner that reflects relevant market
factors. To do so, it is sufficient to relate CSOs' revealed
preferences among program categories, whether through a CSO survey or a
regression analysis, to the sum of all royalties paid. Prior
determinations may have described the allocations that resulted as the
``relative market value,'' \21\ but there is no doubt that royalties
determined in these ways reveal ``relative values'' that are based on
the critical market factor of identified preferences.
---------------------------------------------------------------------------
\20\ For example, in a hypothetical market, a copyright owner
could refuse to grant distant retransmission rights to a local
station unless the local station (and the retransmitting CSO) agreed
to pay an additional royalty (to cover a share of sunk costs and/or
additional profit). The ability of the copyright owner to obtain
such value would be a function of his or her market and bargaining
power. (Because the costs are sunk, the copyright owner would not
rationally walk away from a retransmission agreement as long as some
positive royalty would be paid.) Even at the level of the
``collective,'' a local station in the hypothetical market could use
its market/bargaining power to maximize royalty payments, assuming
it had the economic incentive to do so.
\21\ Actually, in the 2004-05 Determination, the Judges
recognized that neither a survey approach nor a regression approach
(both of which they nonetheless relied upon) identified all aspects
of actual market values as opposed to relative values based on
market forces. See 2004-05 Distribution Order, 75 FR at 57066, 57068
(noting that a CSO survey ``is certainly not a fully equilibrating
model of supply and demand in the relevant hypothetical market,''
and a regression does not ``necessarily identif[y]'' all of ``the
determinants of distant signal prices in a hypothetical free market
. . . .'').
---------------------------------------------------------------------------
In the present proceeding, the parties presented five discrete
analytical methodologies for the Judges to consider in determining
relative market value of the programming types at issue: Regression
analyses, CSO survey results, viewership measurements, a changed
circumstances analysis, and a cable content analysis.
II. Regression Analyses
Regression analysis, when properly constructed and applied, ``is an
accurate and reliable method of determining the relationship between
two or more variables, and it can be a valuable tool for resolving
factual disputes.'' \22\ A particular approach, multiple regression
analysis, ``is the technique used in most econometric studies, because
it is well suited to the analysis of diverse data necessary to evaluate
competing theories about the relationships that may exist among a
number of explanatory facts.'' ABA Econometrics, supra note 22, at 4.
---------------------------------------------------------------------------
\22\ American Bar Association, Econometrics 1-2 (2005) (ABA
Econometrics).
---------------------------------------------------------------------------
A regression can take one of several forms. The linear form is the
most common form, though not the most appropriate for all analyses. As
one court has explained:
[A] linear regression is an equation for the straight line that
provides the best fit for the data being analyzed. The ``best fit''
is the [regression] line that minimizes the sum of the squares of
the vertical distance between each data point and the line . . . .
The regression equation that generates that line can be written as
Y = a + bX + u
Where Y is the dependent variable, a is the intercept [with the
vertical axis], X the independent variable, b the coefficient of the
independent variable (that is, the number that indicates how changes
in the independent variable produces changes in the dependent
variables), and u the regression residual--the part of the dependent
variable that is not explained or predicted by the independent
variable . . . or, in other words, what is ``left over.''
ATA Airlines, Inc. v. Fed. Express Corp., 665 F.3d 882, 890 (7th Cir.
2011) (Posner, J.), cert. denied, 568 U.S. 820 (2012).\23\ See Crawford
CWDT ]] 94-95.
\23\ In a multiple linear regression, the equation would be
expanded, for example as Y = a + bX + cZ + u- with Z an additional
independent variable and c its coefficient.
---------------------------------------------------------------------------
An economist testifying in the present proceeding, Professor Lisa
George, explained how the regression approach may be useful to test
economic theories, describing regression analysis as ``a tool for
understanding how variations in an outcome of interest . . . depends on
various factors affecting that outcome . . . when the factors of
interest are not separately priced or traded.'' George CWDT at 2.
Professor George noted a basic difference between regression analysis
and survey methodology. Regression analysis, unlike survey methodology,
``infers value for decisions actually made in a market.'' Id.
Although regression analysis is a powerful tool, it is important to
appreciate the subtle distinction between econometric correlation
identified by a regression, on one hand, and economic causation
explained by economic theory, on the other:
Econometrics provides a means for determining whether a
correlation, which may reflect a . . . causal relationship, may
exist between various events that involve complex sets of facts. The
principle value of econometrics . . . lies in its use for developing
an empirical foundation in order to prove or disprove assertions
that are based on a particular economic theory . . . . [E]conometric
evidence coupled with economic theory [may] show the likelihood of a
causally-driven correlation between two events or facts. . . .
[Thus] [c]orrelation is distinct from causation. . . . [T]he
correlation is simply circumstantial confirmation of a hypothesized
relationship. If the hypothesized relationship does not make
theoretical sense, the existence of a correlation between the two
variables is irrelevant.
ABA Econometrics, supra note 22, at 1, 3, 5 (emphasis added).
In the present proceeding, the economic theory that the experts put
to the test via regression analysis is whether or not royalties paid
are a function of (caused by) the types of program categories bundled
in distantly retransmitted local stations.
A. Waldfogel-Type Regressions
Professors Crawford, Israel, and George each used a regression
approach based on the regression approach undertaken by Dr. Joel
Waldfogel, an economist who appeared in the 2004-05 proceeding on
behalf of the joint ``Settling Parties,'' including three of the
present parties: The JSC, Commercial Television Claimants (CTV), and
PTV. 2004-05 Distribution Order, 75 FR at 57064. The Judges' findings
concerning his regression (Waldfogel regression) are instructive with
regard to the Judges' analysis in the present proceeding of the
``Waldfogel-type'' regressions proffered
[[Page 3557]]
by Professor Crawford, Professor George, and Professor Israel.
Several features characterize a Waldfogel-type regression. Most
importantly, such an approach attempts to correlate ``variation in the
[program category] composition of distant signal bundles along with
royalties paid to estimate the relative marketplace value of
programming.'' George CWDT at 6. Specifically, Dr. Waldfogel
``regress[ed] observed royalty payments for the bundle on the numbers
of minutes in each programming category. . . . '' Israel WDT ] 22. He
also employed `` `control variables' . . . to hold other drivers of CSO
payments constant.'' Id. Dr. Waldfogel's control variables included the
number of subscribers, local median income, and the number of local
channels. Id.
In the 2004-05 allocation proceeding, the Judges found the
Waldfogel regression ``helpful to some degree'' in assisting the Judges
``to more fully delineate all of the boundaries of reasonableness with
respect to the relative value of distant signal programming. 2004-05
Distribution Order, 75 FR at 57068. The Judges described the Waldfogel
regression as an ``attempt [ ] to analyze the relationship between the
total royalties payed by cable operators for carriage of distant
signals . . . and the quantity of programming minutes by programming
category . . . .'' Id. Conceptually, the Judges found that, ``Dr.
Waldfogel's regression coefficients do provide some additional useful,
independent information about how cable operators may view the value of
adding distant signals based on the programming mix on such signals.''
Id. The Judges also found Dr. Waldfogel's methodology ``generally
reasonable.'' Id. They cautioned, however, that the wide confidence
intervals around Dr. Waldfogel's coefficients limited the usefulness of
his analysis in corroborating survey-based evidence in that proceeding.
Id.\24\
---------------------------------------------------------------------------
\24\ The Judges noted that ``Dr. Waldfogel's specification was
similar in its choice of independent variables to a regression model
utilized by Dr. Gregory Rosston to corroborate the Bortz survey
results in the 1998-99 CARP proceeding. Id. See Report of the
Copyright Arbitration Royalty Panel to the Librarian of Congress,
Docket No. 2001-8 CARP CD 98-99 (1998-99 CARP Report) at 46 (Oct.
21, 2003).
---------------------------------------------------------------------------
The SDC challenge the use of Waldfogel-type regressions in this
proceeding, thus raising as a preliminary question whether or not the
Judges' past acceptance of this regression approach is binding on the
Judges in the present proceeding as a matter of what has been loosely
described as ``precedent.''
The Librarian and the Register considered the extent to which a
CARP should be bound by prior determinations of acceptable royalty
allocation methodologies in the 1998-99 Phase I cable distribution
proceeding.\25\ The Register acknowledged that ``[t]he concept of
`precedent' . . . plays an important role in [these] proceedings,'' but
observed that ``prior decisions are not cast in stone and can be varied
from when there are (1) changed circumstances from a prior proceeding
or; (2) evidence on the record before it that requires prior
conclusions to be modified regardless of whether there are changed
circumstances.'' 1998-99 Librarian Order, 69 FR at 3613-14 (citations
omitted). The Register also referred to a prior Librarian's decision in
which the Register had stated that a CARP ``may deviate from [a prior
decision] if the Panel provides a reasoned explanation of its decision
to vary from precedent . . . .'' Id.
---------------------------------------------------------------------------
\25\ The CARPs were governed by a statutory provision regarding
precedent that was nearly identical to the current section
803(a)(1). See 17 U.S.C. 802(c) (2003) (repealed). Consequently, the
1998-99 Librarian Order remains relevant in spite of the intervening
statutory amendments abolishing the CARP system and creating the
Judges.
---------------------------------------------------------------------------
The Judges understand that they have the authority and, indeed, the
duty, to consider all appropriate factual presentations regarding the
establishment of value in this proceeding in order to allocate
royalties among the several program categories. The Judges consider the
loose use of the term ``precedent'' in this context to be unhelpful.
The concept of ``precedent'' typically relates to judicial deference to
prior legal determinations, not factual ones.\26\
---------------------------------------------------------------------------
\26\ Legal precedents provide stare decisis effect to ``legal
issues . . . prescribing the norms that apply and consequences that
attach to'' facts presented at trial. See A. Larsen, Factual
Precedents, 162 U. Pa. L. Rev. 59, 68 (2013).
---------------------------------------------------------------------------
However, the 1998-99 Librarian Order clearly indicates that factual
challenges to previously-accepted methodologies shall be subject to a
particular evidentiary standard. Specifically, the Judges have been
directed that they may disregard or modify prior methodologies only in
the event of ``changed circumstances'' or because of evidence in the
record that ``requires'' such a change. See Program Suppliers v.
Librarian of Congress, 409 F.3d 395, 402 (D.C. Cir. 2005). The Judges
understand this instruction to be in the nature of a ``precedent''
setting forth the legal standard for the evaluation of fact evidence.
Accordingly, the Judges consider the challenges in this proceeding
to the application of Waldfogel-type regressions by considering whether
there have been either ``changed circumstances'' or the presentation of
other record evidence that ``requires'' a departure from considering
the Waldfogel-type regressions introduced into the record in this
proceeding. Absent evidence of relevant ``changed circumstances'' or
other new evidence in the record specifically identified as such by any
critics of the Waldfogel-type regression approach, the Judges will
evaluate the proffered Waldfogel-type regressions consistent with their
treatment of Dr. Waldfogel's analysis in the 2004-2005 allocation
proceeding.
In the current proceeding, the SDC's economic expert, Dr. Erkan
Erdem, leveled broad criticisms at the use of Waldfogel-type
regressions by Professor Crawford, Professor George, and Dr. Israel,
notwithstanding the Judges' prior contrary conclusions in the 2004-05
Determination. See Written Rebuttal Testimony of Erkan Erdem, Trial Ex.
5007, at 5-6 (Erdem WRT).\27\ Dr. Erdem opined that, conceptually,
``Waldfogel-type regressions do not measure relative market value'' for
two reasons. First, according to Dr. Erdem, CSO royalty payments are
uninformative because they are determined by a statutory formula, not
through free-market negotiations between CSOs and content owners; \28\
and, second, in Dr. Erdem's view, the volume of programming does not
necessarily equate to value. Written Direct Testimony of Erkan Erdem,
Trial Ex. 5002, at 14 (Erdem WDT). Dr. Erdem thus concluded that
``[o]verall, the Waldfogel-type regressions say little about relative
market value'' and at most are ``marginally informative'' as
corroborative evidence. . . . .'' Id. at 18.
---------------------------------------------------------------------------
\27\ Dr. Erdem referred to the Crawford, Israel, and George
analyses as ``Waldfogel-type'' regressions because they ``attempted
to estimate the marginal effect of each minute of programming for
claimant categories using regression analysis in which the dependent
variable is the royalty fees paid by a system and independent
variables include minutes of programming for each claimant category
and other control variables.'' Id.
\28\ Another SDC witness, Mr. John Sanders (a valuation expert
rather than an economic expert), echoed this criticism, as discussed
infra. A Program Supplier economic expert witness, Dr. Jeffrey Gray,
criticized the regression approach to the extent it included minimum
fee-paying CSOs in the analysis, as also discussed infra.
---------------------------------------------------------------------------
The Judges have found previously that Waldfogel-type regressions
are relevant in cable distribution proceedings and find nothing in Dr.
Erdem's testimony in the current proceeding to support changing that
position. Therefore, the Judges reject Dr. Erdem's broad argument that
Waldfogel-
[[Page 3558]]
type regressions are not useful in establishing relative value in this
proceeding.\29\ Of course, this point does not mean that the Judges
therefore necessarily accept all aspects of the application of the
Waldfogel-type regressions by Professor Crawford, Professor George, and
Dr. Israel in this proceeding. Rather, the Judges analyze infra the
more granular critiques of those regressions leveled by various
witnesses, to determine the weight to be accorded to each such
regression.
---------------------------------------------------------------------------
\29\ In this determination, when the use of a particular
Waldfogel-type regression is challenged on one of these broad bases,
the Judges address those specific challenges.
---------------------------------------------------------------------------
B. Crawford Regression Analysis
1. General Principles
CTV called Professor Gregory Crawford as an economic expert
witness. Professor Crawford undertook a Waldfogel-type regression,
which he opined was an appropriate approach for estimating relative
market value among the six allocation-phase categories. Crawford CWDT ]
5. Professor Crawford envisaged a hypothetical market consistent with
the actual market for cable channel carriage in general. Crawford CWDT
]] 8, 36. In Professor Crawford's hypothetical market, the owners of
the distantly retransmitted stations (i.e., broadcasters) are the
sellers of bundles of programming (their respective program lineups),
and the CSOs are the buyers. Crawford CWDT ] 6.\30\ Professor Crawford
opined that CSOs are more likely to retransmit ``distant signals that
carry more highly-valued programming.'' Id. ] 7. Although this
reasoning appears self-evident (ceteris paribus, re-sellers prefer to
sell products that are more valuable), according to Professor Crawford,
this point also has a subtler meaning in connection with CSO decision-
making. Id. ] 46. Specifically, he opined that, because such stations
bundle various types of programming, there can exist across subscribers
a ``negative correlation'' in their ``Willingness to Pay'' (WTP) (in
other words, making the bundle relatively less preferable when a
program from one category is added to the bundle, as opposed to one
from another category). Id. ] 6 (emphasis added).
---------------------------------------------------------------------------
\30\ Professor Crawford does not hypothesize that in this ersatz
market the CSO could replace advertising that was included in the
local broadcast with advertising targeted to the distant market in
which it has been retransmitted. Crawford CWDT ] 37. The Judges find
this approach reasonable because they did not identify any evidence
that would sufficiently support the hypothesis that CSOs would
insert replacement advertising into distantly retransmitted
stations.
---------------------------------------------------------------------------
Accordingly, Professor Crawford concluded that when deciding
whether to enlarge its channel lineup by distantly retransmitting a
television station, a rational CSO would consider the variety, or mix,
of programming on that channel in light of the existing programming mix
offered by the CSO to subscribers across the channel lineup. According
to Professor Crawford, to achieve an optimal programming mix a CSO
would recognize that ``niche taste[ ] channels are more likely to
increase CSO profitability due to the likelihood that household tastes
for such programming are `negatively correlated' with tastes for other
components of cable bundles.'' Id. ] 7. For example, if a channel
lineup were saturated with programming from five of the six program
categories, but had little or no programming in the sixth category,
e.g., PTV, then a CSO might enhance its profitability through fees from
new subscribers, by adding PTV programming, which may have a following
among subscribers who have little or no taste for marginal increases in
programming in other categories.
Professor Crawford's regression adopted the general concept from
the Waldfogel-type regressions. Specifically, Professor Crawford
concluded that the ``most suitable'' econometric regression would
``relat[e] existing distant signal royalty payments to the minutes of
programming of different types carried on distant signals under the
compulsory license . . . .'' Id. ] 46. He favored a regression model
because it is a standard econometric approach utilized to establish the
discrete prices of different elements in a bundle of goods, or the
value of a bundle of attributes in a single good. Id. ] 47.\31\
---------------------------------------------------------------------------
\31\ Despite his advocacy for a regression approach, and for his
particular regression, Professor Crawford acknowledged the
possibility ``for economists to apply alternative approaches to this
problem.'' Id.
---------------------------------------------------------------------------
Thus, Professor Crawford inferred the ``average marginal value'' of
content type (by program category), based on the decisions CSOs made.
2/28/18 Tr. 1400-02 (Crawford). More precisely, as in any Waldfogel-
type regression, he related the relative variation in royalties across
categories to the relative variation in minutes of different categories
of programming. Crawford CWDT ]] 53-54.
In econometric terms, Professor Crawford related the natural log
\32\ of royalties: (1) To the minutes of claimed programming by
category; and (2) to other ``control'' variables.\33\ Id. ] 91.
Professor Crawford's regression looked for a correlation in a
subscriber group between changes in the number of minutes of
programming the subscribers watched by categories and changes in the
percentage of royalties the subscriber group paid while holding
constant other potential explanatory variables (called control
variables).\34\ The variables Professor Crawford controlled for
included the numbers of local and distant stations, the number of
activated cable channels, and the size of the CSO. Id. ] 118 & App. A.
---------------------------------------------------------------------------
\32\ The ``natural log'' (shorthand for logarithm) is ``[a]
mathematical function defined for a positive argument; its slope is
always positive but with a diminishing slope tending to zero,'' and
it ``is the inverse of the exponential function X = ln(ex).'' J.
Stock & M. Watson, Introduction to Econometrics 821 (3d ed. 2015).
For purposes of applied econometrics, using the logarithmic
functional form, showing percentage changes in the variables, may be
more practical.
\33\ A ``control variable'' is an independent (explanatory)
variable that ``is not the object of interest in the study; rather
it is a regressor included to hold constant factors that, if
neglected, could lead the estimated . . . effect of interest to
suffer from omitted variable bias.'' Stock & Watson, supra note 32,
at 280.
\34\ By investigating the change (effect) in percentage terms on
royalties (the dependent variable) from a change in the number of
minutes per program category (the independent variable), Professor
Crawford adopted what is known as a ``log-level'' (a/k/a ``log-
linear'') functional form. See, e.g., J. Wooldridge, Introductory
Economics 865 (3d ed. 2006). This approach allowed Professor
Crawford to compare the effect of a change in the number of program
category minutes to the percent increase in subscriber group
royalties of different sizes. For example, a 100-minute increase in
Program Supplier minutes for a subscriber group in which 10,000 such
minutes are retransmitted represents a 1% increase in such minutes,
whereas the same 100-minute increase for a subscriber group in which
only 1,000 such minutes are retransmitted would represent a 10%
increase. See Crawford CWDT ]] 113-114.
---------------------------------------------------------------------------
Professor Crawford first estimated the average marginal value per
minute of each type of programming by subscriber group. Id. ] 128.\35\
Econometrically, these values are referred to as the coefficients for
each program-category parameter.\36\ Professor Crawford then summed the
marginal value of the compensable minutes each subscriber group
retransmitted. Id. ] 131. Finally, Professor Crawford divided the total
[[Page 3559]]
value of each given programming category by the total value of all
compensated minutes, which produced a percentage reflecting the
relative value of each program category as produced by his regression.
---------------------------------------------------------------------------
\35\ The royalty data on which Dr. Crawford relied came from the
Licensing Division of the Copyright Office via the Cable Data
Corporation (CDC), and were provided to Dr. Christopher Bennett,
another CTV economic witness, who directed the preparation of the
data for Professor Crawford's regression analysis. Crawford CWDT ]
73. Dr. Bennett also obtained and compiled the data relating to the
minutes of different programming types, using raw data obtained from
FYI Television. Crawford CWDT ]] 78-79.
\36\ A ``parameter'' is ``[a] numerical characteristic of a
population or a model,'' whereas a ``coefficient'' is ``an estimated
regression parameter.'' D. Rubinfeld, Reference Guide on Multiple
Regression, reprinted in Reference Manual on Scientific Evidence
463, 466 (2011). The ``true'' value of the parameter is ``unknown,''
but can be estimated, and the coefficient is that estimate. See
Peter Kennedy, A Guide to Econometrics 4 (5th ed. 2003).
---------------------------------------------------------------------------
The percentage totals estimated by Professor Crawford, and the
standard errors \37\ associated with those estimates, by year and
averaged across all four years, were as follows (with standard errors
in parentheses):
---------------------------------------------------------------------------
\37\ The ``standard error is ``[a]n estimate of the standard
deviation of the regression error . . . calculated as an average of
the squares of the residuals associated with a particular multiple
regression analysis.'' Rubinfeld, supra note 36, at 467. The
standard error measures the probability distribution for the
estimates of each parameter in the regression if ``the expert
continued to collect more and more samples and generated additional
estimates . . . .'' ABA Econometrics, supra note 22, at 404.
Table 2--Implied Shares of Distant Minutes by Claimant Categories
--------------------------------------------------------------------------------------------------------------------------------------------------------
Program Commercial TV
Year suppliers (%) Sports (%) (%) Public TV (%) Devotional (%) Canadian (%)
--------------------------------------------------------------------------------------------------------------------------------------------------------
2010.................................................... 27.66 (1.89) 34.29 (3.78) 17.48 (1.50) 15.44 (1.01) 1.02 (0.27) 4.10 (0.33)
2011.................................................... 25.44 (1.67) 32.12 (3.65) 17.93 (1.49) 19.77 (1.22) 0.71 (0.19) 4.02 (0.32)
2012.................................................... 22.84 (1.64) 36.09 (3.86) 17.29 (1.52) 19.03 (1.29) 0.55 (0.15) 4.19 (0.35)
2013.................................................... 20.31 (1.52) 38.00 (3.94) 16.08 (1.45) 20.51 (1.44) 0.51 (0.14) 4.59 (0.39)
2010-13................................................. 23.95 (1.68) 35.19 (3.82) 17.18 (1.49) 18.75 (1.25) 0.69 (0.18) 4.23 (0.35)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Id. ] 141 and Fig. 17.
Professor Crawford did not use these values, however, as his only
estimates of relative market value across the six programming
categories. Rather, he identified an issue with regard to network (and
to a lesser extent, non-network) programming that he believed to
require a further adjustment. Specifically, Professor Crawford noted
that on some distantly retransmitted stations there existed programming
that duplicated programming on the local channels in that market. Id.
at ] 87. According to Professor Crawford, ``[n]etwork duplication is a
non-trivial issue, accounting for 4.6% of minutes carried on distant
broadcast signals . . . .'' Id. This issue, he noted, is particularly
applicable to Big 3 (ABC, CBS, and NBC) network programming, because a
number of local markets to which Big 3 affiliate stations were
distantly retransmitted by a CSO already had a local Big 3 network
affiliate, rendering the retransmitted network programming duplicative.
Professor Crawford understood the relative percentages attributable to
the six categories of programming--because they were averaged across
all minutes of programming--to be distorted by these duplicative
minutes. Id. ]] 81, 85-87, 143. Accordingly, even though network
programming is not compensable in this proceeding, Professor Crawford
made this adjustment as a ``deaveraging'' device, stating: ``I am
attributing the full value of the positive non-duplicate programming
just to the non-duplicate programming (and the zero value of the
duplicate programming to the duplicate programming).'' Id. ] 147.
Assuming a zero value for the duplicative network programming,
Professor Crawford instructed his data analysts to remove the duplicate
network programming.\38\ With those duplications removed, Professor
Crawford re-ran his regression and averaged the relative values of the
six program categories at issue in this proceeding.
---------------------------------------------------------------------------
\38\ Professor Crawford assumed that duplicated programming,
whether or not it was blacked out upon retransmission, had zero
value because the programming was already available on a local
station. Id. ]] 86, 144-145. The Judges find this assumption
reasonable because identical network programs that are broadcast
locally and retransmitted distantly into the same local market are
essentially perfect substitutes. Why are they essentially perfect
and not just perfect substitutes? Because they are on different
channels, the search cost might be different for viewers. For
example a viewer might find a show on local channel 4, but the same
show on a distantly retransmitted station might appear on channel
157, which is not included in the viewer's usual ``channel
surfing.''
---------------------------------------------------------------------------
After making this adjustment, Professor Crawford estimated the
following percentage allocations (with the associated standard errors
set forth below each allocation):
Table 3--Implied Shares of Distant Minutes by Claimant Categories: Non-Duplicate Minutes Analysis
--------------------------------------------------------------------------------------------------------------------------------------------------------
Program Commercial TV
Year suppliers (%) Sports (%) (%) Public TV (%) Devotional (%) Canadian (%)
--------------------------------------------------------------------------------------------------------------------------------------------------------
2010.................................................... 27.06 (1.97) 34.02 (3.96) 19.76 (1.48) 14.01 (1.00) 1.05 (0.25) 4.10 (0.36)
2011.................................................... 24.67 (1.73) 31.78 (3.82) 20.18 (1.45) 18.64 (1.25) 0.73 (0.18) 4.00 (0.35)
2012.................................................... 22.50 (1.72) 35.93 (4.06) 19.64 (1.51) 17.17 (1.27) 0.56 (0.14) 4.20 (0.38)
2013.................................................... 19.74 (1.60) 38.56 (4.17) 18.44 (1.48) 18.09 (1.41) 0.53 (0.13) 4.65 (0.44)
2010-13................................................. 23.40 (1.76) 35.13 (4.02) 19.49 (1.48) 17.02 (1.23) 0.71 (0.17) 4.24 (0.38)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Id. ] 153 & Fig. 20.
2. The SDC Criticisms of Dr. Crawford's Analysis
a. Alleged Flaw in the Algorithm
Dr. Erkan Erdem, the SDC's economist, claimed to have identified a
flaw in the algorithm Professor Crawford used to allocate royalties to
minutes of programming across categories. Dr. Erdem testified that,
because of this alleged flaw, Professor Crawford's model was highly
sensitive to the sequencing in which data was inputted and sorted into
his regression model. Erdem WRT at 2, 14.
However, Dr. Erdem acknowledged receiving additional data from CTV
that pertained to this issue. When Dr. Erdem re-ran the updated data
using Professor Crawford's regression model, Dr. Erdem found only
``slightly different'' results with regard to ``implied shares of
distant minute royalties by claimant categories for both the initial
and nonduplicated analyses . . . presented by Professor Crawford.''
Erdem WRT at 15 n.13.
Dr. Erdem further testified that he did not review and test
Professor Crawford's
[[Page 3560]]
algorithm fully because it would have taken him a week to do so. Id. at
14. Additionally, neither Dr. Erdem nor the SDC pursued this point
further, either in Dr. Erdem's further testimony or in post-hearing
filings and arguments.
Based on the foregoing, the Judges find this criticism to be
insufficient to invalidate or call into question the evidentiary value
of Professor Crawford's regression.
b. Economic Principles Allegedly Not Embodied in Crawford Regression
Analysis
Dr. Erdem noted approvingly certain general economic points that
Professor Crawford made. First, he agreed with Professor Crawford that
it is reasonable to posit that a rational CSO would likely tend to
select stations for distant retransmission that maximize the difference
between anticipated revenue and the cost of acquiring the
retransmission rights. Second, Dr. Erdem agreed with Professor Crawford
that a ``negative correlation'' rationally should exist among
subscribers between different categories of programs, leading CSOs to
engage in strategic bundling of program categories. Id. at 12.
However, Dr. Erdem faulted Professor Crawford for failing to
incorporate these economic observations into the latter's regression
model. With regard to the first point--maximizing the spread between
revenues and costs--Dr. Erdem noted that the royalty fees are set by
statute, so this concept is not applicable in the regulated market. Id.
at 12.
With regard to the second point--the negative correlation of
different programming types between and among subscribers--Dr. Erdem
noted that Professor Crawford did not incorporate this principle into
his regression analysis. Id. Dr. Erdem acknowledged that the program
bundling that results from the negative correlation between program
types has ``important implications,'' but not implications that support
Professor Crawford's regression model. Dr. Erdem asserts that the
negative correlation between program types implies ``that subscribers
likely do not think of distant broadcasts in terms of total minutes . .
. . A more natural unit would be the availability of particular
programs, regardless of their duration or frequency.'' Id. at 13
(emphasis added). Thus, Dr. Erdem suggested that Professor Crawford's
reliance (as is the case in all Waldfogel-type regressions) on
programming minutes as the independent (explanatory) variable with
respect to program type valuation misses the real economic correlation
pertinent to a value estimate, which is the correlation between
royalties and the number of subscribers. Id.
In response to the first point, Professor Crawford noted that his
regression analysis implicitly incorporated this revenue maximization
principle because it identified, ranked, and estimated the relative
value of program categories that maximize economic value for
subscribers given the existence of retransmission costs. Written
Rebuttal Testimony of Gregory Crawford, Trial Ex. 2005, ]] 70-71
(Crawford WRT). With regard to the second point, Professor Crawford did
not expressly state that the negative correlation between programming
types applied to his results. Rather, he noted that the negative
coefficients he had estimated for duplicated network programming\39\ in
part represented the fact that, on average, a station bundle containing
duplicated network minutes would be less valuable to subscribers than
one that did not. 2/28/18 Tr. 1404, 1607-08 (Crawford) (duplicate
programming adds no value and might be blacked-out).\40\
---------------------------------------------------------------------------
\39\ He estimated no negative coefficients for the six program
categories at issue in this proceeding.
\40\ Professor Crawford also estimated a negative coefficient
for nonduplicated network minutes, but he testified that this was
solely an artifact of the regulated rate structure, in which
distantly retransmitted networks ``only pay royalties of .25 DSE.''
2/28/18 Tr. 1605 (Crawford). The Canadian Claimant Group's expert,
Professor George, understood the negative coefficients for a program
category to reflect that programs in such a category would reduce
the value of a station bundle compared with programs from other
program categories. 3/5/18 Tr. 2117-18 (George); see id. at 2031
(``the negative coefficient here is telling us that this is
effectively dragging down the value of the Canadian signals. . . .
[I]if we could replace the Program Supplier content on Canadian
signals in a sort of hypothetical world . . . with Joint Sports or
Canadian Claimant programming, the value of the signal would be
higher. And so this coefficient, the negative coefficient, isn't
really surprising to me in this context . . . .'').
---------------------------------------------------------------------------
The Judges agree with Dr. Erdem that Professor Crawford's
regression analysis does not literally demonstrate that CSOs seek to
maximize the difference between revenues and costs as they would in an
unregulated market. Because royalty costs are determined independently
from retransmission decisions (especially with regard to the first DSE,
which is retransmitted in exchange for a mandatory minimum fee, as
discussed infra), CSOs do not and cannot engage in the sort of marginal
profit maximization decisions buyers/licensees would undertake in an
unregulated market. However, that does not mean that CSOs do not engage
in maximizing behavior through marginal analyses that weigh the
relative values of adding additional programming from different program
categories, -notwithstanding the presence of the regulated royalty
rate.
The Judges give no weight, however, to Dr. Erdem's speculation as
to how subscribers value programs of varying lengths. Dr. Erdem did not
undertake any affirmative analysis and presented no original
methodology. Thus, even assuming arguendo there might be value in such
a subscriber-based value analysis, Dr. Erdem did not present one here.
c. The ``Distant Minutes'' Criticism
Dr. Erdem noted that Professor Crawford's regression, because it is
a Waldfogel-type regression, ``assigned a predominant role'' to the
number of distant minutes retransmitted by each program category. Dr.
Erdem thus characterized Dr. Crawford's regression as a ``volume
focused'' approach. Erdem WDT at 14. Dr. Erdem questioned whether
Professor Crawford's key variable--``distant minutes'' by category--
really explained a ``significant share of the variation in royalty
fees.'' Erdem WRT at 15. To answer that question, Dr. Erdem
``estimate[ed] a regression model with only total distant minutes for
each claimant group as the independent (explanatory) variable.'' Id.
Dr. Erdem found that the number of distant minutes by claimant group
explained ``very little'' of the variation in royalties as measured by
adjusted R\2\. Id. at 15-16.\41\
---------------------------------------------------------------------------
\41\ R\2\ in a multiple regression model is ``the proportion of
the total sample variation in the dependent variable [royalties-by-
category here] that is explained by the independent variable here,
[the number of distant minutes by claimant group].'' Wooldridge,
supra note 34, at 868. In more practical terms, ``R\2\ provides a
measure of the overall goodness-of-fit of the multiple regression
equation [with] value ranges from 0 to 1. An R\2\ of 0 means the
explanatory variables explain none of the variation of the dependent
variable; an R\2\ of 1 means that the explanatory variables explain
all of the variation.'' ABA Econometrics, supra note 22, at 409.
``There is no clear-cut answer [as] to [w]hat level of R\2\, if any,
should lead to a conclusion that the model is satisfactory.'' Id.
---------------------------------------------------------------------------
In response, Professor Crawford noted that his regression, like all
Waldfogel-type regressions, ``does not measure the relative value of a
programming type using only the number of minutes of . . . programming
type.'' Crawford WRT ] 74. Rather, such regressions also ``measure the
average value per minute to CSOs of each programming type[,] [and then]
multiply[ ] the average value per minute by the number of minutes of
programming, giv[ing] the total value of each program type.'' Id. ] 75.
Then, the total value of each program type is converted to ``average
values per minute of each claimant's programming via Professor
Crawford's regression (and,
[[Page 3561]]
indeed, any Waldfogel-type regression). As Professor Crawford opined,
it is the ``variation in the royalties paid by CSOs'' across each
programming category that allows the regression ``to infer the average
value per minute'' of each programming category, and ``[t]hese
estimated average values per minute are the estimated coefficients'' in
the regression. Id. ] 76.
The Judges find that Dr. Erdem's analysis, although apparently
accurate, is off-point and does not diminish the value of Professor
Crawford's regression (or any similarly-constructed Waldfogel-type
regression). The Judges recognize that the two elements multiplied in
such a regression--the volume of total minutes per program category and
the value-per-minute are both functions of volume. The former, volume
of minutes per program category, is facially a volume metric. Professor
Crawford recognized that if a regression measured only volume, then it
would be properly subject to criticism. Crawford WRT ] 74. But the
latter factor in the product, the value-per-minute, is not subject to
the same criticism. The value-per-minute factor is a metric for
relative value, estimating the CSOs' relative demand for different
categories of programming. To criticize the product as related to
volume, therefore, misses the mark, because it is relative value that
the Judges must determine in this proceeding.
With regard to Dr. Erdem's rebuttal critique, in which he found the
R\2\ calculation to demonstrate little correlation between categorical
programming minutes and royalties, Professor Crawford had a persuasive
rejoinder. Professor Crawford explained that it would be as
uninformative as it would be unsurprising that the number of distant
minutes alone--as Dr. Erdem found--would better estimate the royalties
paid (via a higher R\2\). Professor Crawford explained that the purpose
of his regression is to demonstrate the ``effect'' of different
programming (by category) on the relative royalties, not simply to find
the regressor (independent variable) that best ``predicts'' the level
of royalties. Crawford WRT ]] 91-95. Thus, Professor Crawford opined,
his regression is relevant to the economic issue at hand: The relative
value of program categories.\42\
---------------------------------------------------------------------------
\42\ Professor Crawford calculated an R\2\ of .247 for his
duplicate analysis and an R\2\ of.246 for his non-duplicate
analysis. Crawford CWDT Appx. B at B-2.
---------------------------------------------------------------------------
The Judges do not agree that Dr. Erdem's calculation of a higher
R\2\ alone for his alternative approach demonstrated a deficiency in
Professor Crawford's regression. As one econometric expert has
explained:
[A] low R\2\ does not necessarily imply a poor model (or vice versa)
. . . What level of R\2\, if any, should lead to a conclusion that
the model is satisfactory? Unfortunately, there is no clear cut
answer to this question, since the magnitude of R\2\ depends on the
characteristics of the data series being studied . . . . [A] high
R\2\ does not by itself mean that the variables included in the
model are the appropriate ones. . . . As a general rule, courts
should be reluctant to rely on a statistic such as R\2\ to choose
one model over another.
Rubinfeld, supra note 36, at 425, 457.
Dr. Rubinfeld's emphasis on identifying the ``appropriate''
variables leads to Professor Crawford's next response to Dr. Erdem's
critique. According to Professor Crawford, from the perspective of
economic analysis (as opposed to purely econometric analysis), Dr.
Erdem's critique failed to address the institutional and economic
concerns in this proceeding, viz., how to determine the relative value
of the different program categories in an allocation proceeding.
Crawford WRT ] 95. Professor Crawford maintained that his regression
properly identifies the relative relationships at issue in this
proceeding.
d. Alleged Failure To Focus on Impact of the ``Number of Distant
Subscribers''
Dr. Erdem asserted that a control variable in Professor Crawford's
regression--the ``number of distant subscribers''--was statistically
significant and accounted for a large share of the variability in the
royalties. Erdem WRT at 17. Accordingly, Dr. Erdem concluded that
Professor Crawford's regression inaccurately and wrongly emphasized a
correlation between program minutes (across categories) and royalty
variability, when the more significant correlation was between the
number of distant subscribers and the variability of royalties. Id.
In response, Professor Crawford explained that Dr. Erdem had failed
to use the proper measure of ``distant subscribers,'' which led Dr.
Erdem in essence to double-count the number of distant subscribers,
thus invalidating his argument. Crawford WRT ] 104.\43\ Dr. Erdem was
compelled to concede at the hearing that his manipulations in his
Models numbered 1 through 6 should all be ignored. 3/8/12 Tr. 2779-80
(Erdem).
---------------------------------------------------------------------------
\43\ In fact, as discussed infra, Dr. Erdem subsequently agreed
with Professor Crawford's criticism in this regard, and the SDC
moved for leave to correct Dr. Erdem's testimony, but the Judges
entered an order denying that motion as out of time.
---------------------------------------------------------------------------
Accordingly, the Judges do not give any weight to this
criticism.\44\
---------------------------------------------------------------------------
\44\ Dr. Erdem modeled several of his additional critiques,
discussed infra, by combining the impact of those critiques with the
impact of his admittedly erroneous measure of the number of
``distant subscriber minutes.'' The Judges separately consider those
further critiques on their own merits, not only in the interest of
completeness, but also to consider whether or not these other
criticisms have qualitative value, notwithstanding that their impact
cannot be quantified by resort to Dr. Erdem's modeling that bundled
those critiques with the admittedly tainted measure of ``distant
subscriber minutes.''
---------------------------------------------------------------------------
e. The Zero Minutes Issue
Dr. Erdem pointed out that Professor Crawford's two models
contained numerous zeros (i.e., instances when there was no distant
content being retransmitted for a particular claimant category). More
particularly, Dr. Erdem noted that for the duplicated analysis, the
Canadian distant programming minutes had about 94 percent zeros,
followed by PTV with approximately 59 percent, the JSC with
approximately 10 percent, and between 5-8 percent for the remaining
categories. (These percentages remain essentially unchanged for the
nonduplicated analysis.) Erdem WRT at 17-18.
Dr. Erdem asserted that because zero represented a floor on the
number of minutes any programming category could have offered,
Professor Crawford's failure to control for the presence of a non-
trivial number of zeros has the ``potential'' to skew the coefficients
Professor Crawford estimated in his models. In an attempt to address
this issue, Dr. Erdem reworked Professor Crawford's regression approach
by including ``indicator variables'' for instances in which the distant
minute variables were zero. He then re-estimated Professor Crawford's
two models, creating what he called ``Model 3.'' Dr. Erdem's Model 3
cumulatively reworked Professor Crawford's duplicated and nonduplicated
regressions to incorporate, inter alia, the distant subscriber
instances and the zero-minutes indicator issue. Erdem WRT at 38, 40.
Dr. Erdem found that, relative to Professor Crawford's regression
model, adding the indicators for instances with zero distant minutes
increased the PS and PTV shares by approximately 6 percentage points
and 1-2 percentage points, respectively. The Devotional share increased
by approximately 1 percentage point while the CTV share decreased by
approximately 10 percentage points. The JSC share increased by
approximately 1
[[Page 3562]]
percentage point, and the Canadian share decreased by approximately
0.4-0.5 percentage points. Id.
Because these revised percentages also incorporate Dr. Erdem's
erroneous adjustment for his ``distant subscriber instances'' variable,
his ``Model 3,'' must be ignored. 3/8/18 Tr. 2779-80 (Erdem). Further,
as a separate problem with Dr. Erdem's critique, he did not opine that
Professor Crawford's treatment of the number of zeros was improper or
that it had caused a skewing of the coefficients; rather Dr. Erdem
testified only that such skewing was a ``potential'' problem--one that
Dr. Erdem would have elected to address with the use of an indicator
variable.\45\ The Judges understand this point to indicate that
although Dr. Erdem would have undertaken a different approach, he did
not opine that Professor Crawford's approach was unreasonable.
Accordingly, the Judges are unpersuaded that this criticism served to
undermine the usefulness of Professor Crawford's regression
analysis.\46\
---------------------------------------------------------------------------
\45\ An ``indicator variable,'' also known as a ``dummy
variable'' is a ``[a]variable that takes on only two values, usually
0 and 1, with one value indicating the presence of a characteristic,
attribute or effect and the other value indicating absence.''
Rubinfeld, supra note 36, at 464.
\46\ The Judges are also unconvinced that the number of zeros is
as striking as Dr. Erdem suggested. For example, the high percent of
zeros for Canadian claimants would be consistent with the inevitable
absence of any retransmissions of Canadian stations outside the
Canadian zone.
---------------------------------------------------------------------------
f. Sensitivity of Nonduplicated Minutes Model
In his nonduplicated model, Professor Crawford included as an
additional variable the total number of nonduplicated minutes. Dr.
Erdem noted that Professor Crawford explained that ``[t]his new
covariate plays the same role in the final econometric model that the
number of distant signals plays in the initial econometric model.''
Erdem WRT at 19 (quoting Crawford CWDT ] 165 n.57). However, Dr. Erdem
discovered that in this nonduplicated model the number of distant
signals was still present, together with the new variable, (i.e., the
total number of nonduplicated minutes). Dr. Erdem determined that these
two variables were almost perfectly correlated (a 0.998 correlation),
rendering ``the rationale for including that additional variable . . .
less clear.'' Erdem WRT at 19.\47\
---------------------------------------------------------------------------
\47\ When two covariates are highly or perfectly correlated with
each other, the regression can suffer from a ``multicollinearity''
problem, whereby the model does not reveal the separate effects of
each of the two variables. See Rubinfeld, supra note 36, at 465
(``Multicollinearity [a]rises in multiple regression analysis when
two or more variables are highly correlated.'').
---------------------------------------------------------------------------
To analyze this issue, Dr. Erdem performed a sensitivity analysis,
or test \48\, rerunning the nonduplicated model without the total
nonduplicated minutes variable. Dr. Erdem's ``Model 5'' presented
regression results and estimated royalty shares from this analysis. See
Erdem WRT Ex. R3. Compared to his Model 4, excluding the added variable
decreased the Program Supplier share by approximately 0.2 percentage
points, the JSC share by about 2 percentage points, the CTV share by
about 2 percentage points the PTV share by about 0.3 percentage points.
The Devotional and Canadian shares remained approximately the same. See
Erdem WRT at 19, Ex. R3.
---------------------------------------------------------------------------
\48\ A ``sensitivity analysis'' is ``[t]he process of checking
whether the estimated effects and statistical significance of key
explanatory variables are sensitive to inclusion of other
explanatory variables, functional form, dropping of potential out-
lying observations, or different modes of estimating.'' Wooldridge,
supra note 34, at 869. The issue of robustness is related to the
issue of sensitivity: ``The issue of robustness [addresses] whether
regression results are sensitive to slight modifications in
assumptions.'' Rubinfeld, supra note 36, at 43; see also Peter
Kennedy, A Guide to Econometrics at 11 (5th ed. 2003) (defining the
``robustness'' of an estimator as ``insensitivity to violations of
the assumptions under which the estimator has desirable properties .
. . .''). Importantly, because ``[e]valuating the robustness of
multiple regression results is a complex endeavor . . . there is no
agreed-on set of tests for robustness which analysts should apply.
In general, it is important to explore the reasons for unusual data
points.'' ABA Econometrics, supra note 22, at 24; accord Rubinfeld,
supra note 36, at 437.
---------------------------------------------------------------------------
The Judges find that these modest percentage point differences
would not diminish the value of Professor Crawford's nonduplicate
minute regression, in part because the regression approach is by design
an estimate rather than a precise measure.\49\ Moreover, Dr. Erdem's
modest changes are derived from his alternative models that also
incorporate his erroneous distant subscriber minutes approach, which
Dr. Erdem acknowledged to invalidate his adjustments to a number of his
models, including Models 4 and 5. See 3/8/18 Tr. 2779-80 (Erdem).
---------------------------------------------------------------------------
\49\ The Judges also do not find this to be a potential problem
with regard to the use of Professor Crawford's regression to
identify relative values, because these two covariates (the number
of nonduplicated minutes and the number of distant signals) are
control variables used to hold all other potential effects fixed
while analyzing program category minutes as the independent
variables--and the Judges do not identify in Dr. Erdem's testimony
any impact of his claimed multicollinearity on the purported
explanatory effect of program categories on royalties.
---------------------------------------------------------------------------
g. The WGNA Indicator Variable
Dr. Erdem altered Professor Crawford's approach by including a
dummy variable to indicate the presence (or absence) of WGNA. This
alteration increased the Program Supplier share by approximately 2
percentage points, increased the CTV and PTV shares by approximately 1
percentage point, respectively, and decreased the JSC shares by about 4
percentage points. The shares of the Devotional and Canadian categories
increased by 0.1 and 0.3 percentage points, respectively. Erdem WRT at
18-19.
However, Dr. Erdem did not expressly conclude that the absence of
this WGNA indicator variable in Professor Crawford's regression
analysis demonstrated that the latter's approach was inappropriate or
less relevant. Indeed, Dr. Erdem ended this particular analysis by
suggesting only that the use of an indicator variable regarding the
presence (or absence) of WGNA among the distantly retransmitted
stations could be suggestive of an outlier effect arising from the
presence of WGNA, yet Dr. Erdem conceded that ``Professor Crawford's
model does not exhibit sensitivity to outliers.'' Erdem WRT at 19
n.17.\50\ Accordingly, Dr. Erdem's criticism in this regard does not
diminish the value of Professor Crawford's regression analysis. And,
once more, Dr. Erdem's estimate of the impact of this criticism was
bundled together with, inter alia, his admittedly erroneous adjustment
for distant subscriber minutes, thereby tainting the measure of this
adjustment.
---------------------------------------------------------------------------
\50\ More particularly, Dr. Erdem acknowledged that because
Professor Crawford had utilized a ``larger sample,'' Erdem WRT at
20, n.17, Professor Crawford's regression analysis was not subject
to an outlier problem. In fact, Professor Crawford's data included
programming minutes using the population of programs carried on all
imported distant broadcast signals, rather than using estimates of
programming minutes based on sampling the programs carried on
distant broadcast signals. Crawford CWDT ] 72.
---------------------------------------------------------------------------
h. Geographical Effects
The SDC noted that a CTV economic expert witness, Dr. Christopher
Bennett, found that ``over 90% of the distant signals imported were
within 150 miles of the community served, and over 95% were within 200
miles.'' Corrected Written Direct Testimony of Christopher Bennett,
Trial Ex. 2006, ] 31 & Fig. 6 (Bennett CWDT).\51\ Accordingly, Dr.
Erdem asserted that the positive coefficients in Professor Crawford's
regression ``could'' have been driven by factors ``like'' geography,
emphasizing
[[Page 3563]]
the values and preferences of large urban areas and de-emphasizing the
values and preferences of smaller rural areas. 3/8/18 Tr. 2688-91
(Erdem).
---------------------------------------------------------------------------
\51\ Dr. Bennett, who compiled data for Professor Crawford's
regression analyses, excluded superstations such as ``WGN, WPIX,
WSBK, and WWOR, which historically were distributed nationwide by
satellite [and] were excluded in distance analyses presented in
previous copyright royalty distribution proceedings.'' Bennett CWDT
] 30, n.15.
---------------------------------------------------------------------------
In response, CTV pointed out that Professor Crawford's regression
contained variables that controlled for geographic effects. In
particular, CTV noted that the SDC had in fact acknowledged that
Professor Crawford's regression included ``system-level fixed effects
[that] introduce a form of geographic control . . . .'' \52\ SDC PFF ]
101 (citing 3/8/18 Tr. 2709-10 (Erdem)).\53\ Moreover, CTV pointed out
that Professor Crawford's regression also included as a control
variable the number of local signals at the subgroup level, which also
helped account for geographical market differences (including market
and Designated Market Area (DMA) size) across subgroups within the
systems. See Crawford CWDT App. B Fig. 22; see also Written Rebuttal
Testimony of Ceril Shagrin, Trial Ex. 2009, ] 20 & Exs. A, B (Shagrin
WRT) (number of local stations is prime indicator of market size).
---------------------------------------------------------------------------
\52\ ``Fixed effects'' variables are potential effects on the
dependent variable (here, categorical royalties) by other factors
that are unobserved by the regression. Wooldridge, supra note 34, at
461. (To put the ``fixed effects'' variables in context, they differ
from the ``error term,'' which reflects ``idiosyncratic error,''
id., and differ from a control variable in that, as noted supra, a
control variable is one that is known and expected to impact the
dependent variable (categorical royalties here), but ``is not the
object of interest in the study'' and thus held constant by the
econometrician. Stock & Watson, supra note 32, at 280.
\53\ The SDC argue that this control caused a new geographic
effect that Professor Crawford's regression ignored: ``some''
stations ``could'' be local as well as distant within some
subscriber groups. SDC PFF ] 101 (and record citations therein).
However, speculation as to the existence of this possibility and its
possible extent are insufficient to invalidate or diminish the
evidentiary value of the geographic controls used by Professor
Crawford in his regression.
---------------------------------------------------------------------------
The Judges find that Professor Crawford's regression controlled for
geographic effects. Dr. Erdem's criticism to the contrary appears to be
based on a difference of opinion as to how to account for the
geographic issue rather than any error in Professor Crawford's
regression analysis. Additionally, the Judges do not find that a
regression that weighs more heavily the value of programs retransmitted
to more people is inherently suspect. Indeed, the opposite is the case.
To use Dr. Erdem's example, population density is greater in areas
adjacent to urban areas where professional sports teams are based and
will demand more professional sports. See 3/8/18 Tr. 2689 (Erdem). This
subscriber demand causes a CSO serving their subscriber group to have a
derived demand for the retransmission of stations with more JSC
programming. More JSC programming leads to higher JSC royalties
relative to whatever other programming is more popular in areas where,
as Dr. Erdem testified, there exist ``smaller systems with smaller
number of subscribers and smaller fees . . . .'' 3/8/18 Tr. 2690
(Erdem). In short, the Judges see this phenomenon as an attribute of
Waldfogel-type regressions, including Professor Crawford's regression
analysis.\54\
---------------------------------------------------------------------------
\54\ This point regarding geographic effects also relates to
what Dr. Erdem asserted is an anomaly in a Waldfogel-type regression
such as undertaken by Professor Crawford. Dr. Erdem claims that if a
certain type of programming (Devotional, for example) were more
popular on lower fee paying cable systems, the lower fee status of
that system would cause Devotional programming to have a lower
coefficient and a lower royalty share under the regression. However,
if that cable system decided ``this category of programming isn't
doing it for us'' and thus eliminated Devotional programming, that
programming category elimination would anomalously cause the
Devotional coefficient to increase, because it would no longer be
associated with that lower fee paying cable system. 3/8/18 Tr. 2685-
86 (Erdem). The flaw in that argument is two-fold. First, although
the Devotional coefficient might increase, there would be fewer
minutes of programming to multiply by that coefficient, which would
reduce the relative share allocated to Devotional programming under
a Waldfogel-type regression. Second, a cable system would distantly
retransmit Devotional programming, even if it generated lower
royalties relative to other CSOs in other regions, because the CSO
is incentivized by increasing or retaining subscribers, not by
maximizing royalties compared with other CSOs. Again, the Judges
emphasize that the hypothetical buyer is the CSO, not the copyright
owner, and the relative value of a program category is based on its
economic contribution as part of a bundle to the CSO, not the
royalty it might generate in any other context. The royalties flow
from such carriage decisions and those decisions are made by each
CSO with varying receipts (constrained by the WTP of its subscriber
base), averaged through a Waldfogel-type regression.
---------------------------------------------------------------------------
i. Ignoring Signals That CSOs Chose Not To Carry
The SDC also criticized Professor Crawford for not taking into
account in his regression the impact on value of the stations that were
``not retransmitted.'' SDC PFF ] 81 (citing 2/28/18 Tr. 1494-5
(Crawford)) (emphasis added). The SDC noted that Professor Crawford had
written a published article that indicated that an approach accounting
for stations that were not retransmitted could have been applied to
determine program category value in the present proceeding. SDC PFF ]
82 (citing 2/28/18 Tr. 1497-98 (Crawford)). However, nothing in the
record suggested that the potential usefulness of such an alternative
regression approach called into question the validity, reasonableness,
or persuasiveness of the regression approach undertaken by Professor
Crawford in the present proceeding, which approached the relative value
analysis from a perspective that analyzed the programs and stations
that were transmitted. Indeed, the SDC do not cite any expert witness
in the present proceeding to support their conclusory assertions in
proposed findings of fact that Professor Crawford's decision not to
analyze non-transmitted stations and programs compromised his analysis
in this proceeding. See SDC RPFF ]] 81-82. Accordingly, the Judges find
that this criticism does not diminish the value of Professor Crawford's
regression analysis in this proceeding.
j. Number of Subscribers as Control Variable
The SDC noted that Professor Crawford used the log of fees paid as
his dependent variable (expressing changes in fees paid in percentage
terms), but he expressed changes in ``the number of subscribers--one of
his control variables--in level form (i.e., linear, or non-log). SDC
PFF ] 102 (citing 2/28/18 Tr. 1541, 1550 (Crawford)). The SDC's expert,
Dr. Erdem, testified that Professor Crawford's use of the linear form
for this control variable was improper, because it failed to correspond
with the actual relationship between royalty fees and subscribers,
i.e., a percentage change in the number of subscribers corresponds with
an equal change in the percentage of royalty fees). 3/8/18 Tr. 2770-71
(Erdem). As a consequence, Dr. Erdem maintained, Professor Crawford had
introduced statistical ``bias'' \55\ into his regression. Id. at 2716-
17 (Erdem).
---------------------------------------------------------------------------
\55\ ``Bias'' is ``[a]ny effect . . . tending to produce results
that depart systematically (either too high or too low) from the
true values. A biased estimator of a parameter [e.g., a regression
parameter] differs on average from the true parameter.'' Rubinfeld,
supra note 36, at 463-64. Somewhat more formally, ``bias'' reflects
``[t]he difference between the expected value of an estimator and
the population value that the estimator is supposed to be
estimating.'' Wooldridge, supra note 34, at 859.
---------------------------------------------------------------------------
To address this criticism, Dr. Erdem, undertook a sensitivity test
and transformed the control variable for the number of subscribers into
log form. 3/8/18 Tr. 2767 (Erdem). He found that this linear-to-log
transformation improved the fit of the regression, increasing the R\2\
metric from approximately .24 to .97. (A higher R\2\ indicates a
tighter fit of within the data points, see supra note 41).
In response, CTV and Professor Crawford argued that Dr. Erdem
misapplied a principle that might be valid in a ``prediction''
regression. Professor Crawford maintained though that his own
regression on behalf of CTV was an ``effects'' regression,
[[Page 3564]]
seeking to explain the issue at hand, i.e., how different program
categories correlate with the royalties paid. According to Professor
Crawford, his regression analysis was not a ``prediction'' regression
designed to identify the best predictors of royalties paid. Thus, he
argued, it was important to use control variables that keep constant
the effects on the dollar amount of royalties paid in order to
determine the relative values among program categories, which was the
purpose of the regression. 2/28/18 Tr. 1393-94, 1430, 1549-50
(Crawford).
Professor Crawford explained what he understood to be a fundamental
mistake made by Dr. Erdem:
Dr. Erdem misunderstands the purpose of an econometric analysis
in this proceeding. . . . For the goal of prediction, the focus is
on finding the explanatory variables that best predict the outcome
of interest . . . . [I]f the goal is to predict stock prices and the
price of tea in China helps, then . . . include it in the model (and
don't worry about the economic interpretation of its coefficient).
That is not the purpose in this proceeding, however. In this
proceeding, experts are using econometric analyses to help the
Judges determine . . . relative marketplace value . . . . The
dependent variable in these regressions, the royalties cable
operators pay for the carriage of the distant signals, are
informative of this relationship . . . . The key explanatory
variables in this relationship, the minutes of programming of the
various types carried on distant signals, are informative as the
impact they have on royalties reveals the relative market value of
each programming type. Other explanatory variables are included in
the model to control for other possible determinants of cable
operator royalties. This helps improve the statistical fit of the
regression (to ``reduce its noise''), providing more precise
estimates of the impact of programming minutes that are the focus of
the analysis.
. . .
The goal here is to find the econometric model that can best
reveal relative marketplace value. Doing so means crafting the
econometric model to reflect the institutional and economic features
of the environment that is generating the data being used. . . . The
econometrician determines which explanatory variables to include not
based exclusively on statistical criteria regarding the overall fit
of the model, but also on whether there are good economic and/or
institutional justifications for including that variable.
Crawford WRT ]] 91-94 (footnotes omitted) (emphasis added).
Accordingly, Professor Crawford testified that the R\2\ measure on
which Dr. Erdem relied is not relevant to the task at hand, because
that measure does not explain the relative values of the several
program categories, but rather shows ``how much of the variation in the
dependent variable can be explained by the control or explanatory
variables.'' Crawford WRT ] 93.
Applying this distinction more particularly to the present dispute,
Professor Crawford defended his use of a linear control variable for
the number of subscribers as sufficient for its intended purpose--to
avoid statistical bias and distortion. He contrasted his approach with
Dr. Erdem's claim that a log control variable would be preferable, with
Professor Crawford asserting that Dr. Erdem's proposed log
transformation did not merely control for the royalty formula, but
rather essentially replicated the formula for calculating royalties,
thereby distorting the regression results. 2/28/18 Tr. 1429-30, 1552
(Crawford). That is, Dr. Erdem's log approach might well have been
appropriate to predict a meaningful correlation between the percentage
change in royalties and the percentage change in the number of
subscribers, but that is not informative (and thus not relevant) as to
the effect, if any, of the impact of the different program categories
within the distantly retransmitted stations on the dollar amount of
royalties that were paid.
The Judges find that Professor Crawford's regression is not
compromised by his use of the linear form to express the number of
subscribers in this control variable. If the Judges' statutory task
were to identify and rank all the causes of a change in total
royalties, the change in the number of subscribers apparently might be
the chief causal element because the statutory royalty fee is a percent
of receipts. Changes in the dollar value of receipts, naturally, are
directly related, on a percentage basis, to percentage changes in the
number of subscribers. But the Judges' legal, regulatory, and economic
task in this proceeding is to determine the relative market value of
different categories of programming; thus, any correlation between the
number of subscribers and royalties is not in furtherance of that
objective. Rather, Professor Crawford's use of a linear form for the
number of subscribers served to control for the size of the system
without overriding the purpose of the regression, which was to measure
the effects (if any) of different program categories on royalties paid.
The Judges not only find Professor Crawford's assertions in this
regard persuasive, they note that his opinion has some support in the
academic literature.\56\ See G. Shmueli, To Explain or to Predict?, 25
Statistical Science 289, 290-91, 297 (2010) (``The criteria for
choosing variables differ markedly in explanatory versus predictive
contexts.''); see also F.M. Fisher, Multiple Regression in Legal
Proceedings, 80 Colum. L. Rev. 702, 720 (1980) (The R\2\ measure ``must
be approached with a fair amount of caution, since R\2\ can be affected
by otherwise trivial changes in the way in which the problem is set
up.'').
---------------------------------------------------------------------------
\56\ Professor Crawford did not support his lengthy exposition
(quoted in some detail in the text, supra), with any references to
learned treatises or other authorities, nor did Dr. Erdem support
his critique in such a manner. The experts for all parties were
guilty of this omission throughout their respective testimonies, a
problem the Judges find disturbing particularly in the present
context, causing dueling esoteric econometric positions sometimes to
devolve into ipse dixit disputes.
---------------------------------------------------------------------------
The Waldfogel-type regression is an example of modeling utilized to
explain the effects of different program categories on the relative
payment of royalties--rather than an attempt to predict the level of
royalties. Thus, as Professor Shmueli wrote, the choice of variables
can reasonably be based on the ``underlying theoretical model.'' Id.;
see also F.M. Fisher, Econometricians and Adversary Proceedings, 81 J.
Am. Stat. Ass'n 277, 279 (1986) (``There is a natural view that models
are supposed to do nothing other than predict . . .'' resulting in the
``danger'' of ignoring ``better models that do not fit or predict quite
so well but are in fact informative about the phenomena being
investigated.'') (emphasis added).\57\
---------------------------------------------------------------------------
\57\ This econometric point regarding the appropriate use of
different models is of a piece with the Judges' statement in Web IV
that no one economic model is appropriate to explain all market
activity. Determination of Royalty Rates and Terms for Ephemeral
Recording and Webcasting Digital Performance of Sound Recordings
(Web IV), 81 FR 26 316, 26 334-35 (May 2, 2016).
---------------------------------------------------------------------------
Because the Judges find in this proceeding, as in past proceedings,
that the theoretical model of a Waldfogel-type regression is reasonable
and useful in this context, Dr. Erdem's criticism regarding Professor
Crawford's use of a linear control variable for the number of
subscribers does not diminish the value of his regression analysis in
this proceeding.
k. Purportedly Incorrect Consideration of Network Programming
The SDC asserted that Professor Crawford failed to analyze
correctly the impact of the number of distant signals and the total
number of minutes in his nonduplicated minutes analysis, which caused
his coefficients to be uninterpretable and certain coefficients to turn
negative, falsely implying a negative value for such retransmitted
distant programming. However, a substantial portion of this assertion
grew out of Dr. Erdem's tardy and thus
[[Page 3565]]
rejected proposed rebuttal testimony. See 3/8/18 Tr. 2704-05 (Erdem).
Thus, Dr. Erdem's written testimony and the SDC's affirmative case at
the hearing do not support the SDC's criticisms in this regard.
However, the SDC had some success in raising this issue on cross-
examination of Professor Crawford, who appeared to acknowledge that
nonduplicated network programming had positive value that he had not
added back into his analysis. 2/28/18 Tr. 1572 (Crawford). Professor
Crawford attempted to discount the import of this factor, asserting
that adding in such values would have caused a ``common level shift''
in all the coefficients. 2/28/18 Tr. 1573 (Crawford). However, when
confronted on cross-examination with the logarithmic (percentage)
impact on the coefficients (and thus the relative values), Professor
Crawford became uncertain as to whether he should have considered the
logarithmic (percentage) impact of nonduplicated network programming.
More particularly, having considered the issue on the witness stand,
Professor Crawford was then asked by cross-examining counsel whether he
was ready to agree that he ``should have taken into account the value
of the . . . coefficient that would be implied for the nonduplicated
network programming''--to which he replied: ``So I am not sure that I
do [agree] [a]nd I am not sure that I don't.'' 2/28/18 Tr. 1581
(Crawford).
Professor Crawford and CTV further responded to this nonduplicated
network minutes argument by noting that the impact of the issue, if
any, was indeterminate, because Professor Crawford had lumped
nonduplicated network minutes with off-air programming as a single
control variable, not as an input to determine the values of the
coefficients of interest. 2/28/18 Tr. 1625-29 (Crawford). Additionally,
Professor Crawford explained that, in any event, the purpose of the
``total non-duplicate minutes'' variable was to serve the same volume
control function as the ``number of distant signals'' variable in the
initial regression.
The Judges find that Professor Crawford's admitted uncertainty as
to the impact of nonduplicated network programming minutes on the
relative values of his coefficients somewhat diminishes the probative
value of his non-duplicated model. Further, the fact that Professor
Crawford's purpose in adding these minutes was to insert a control
variable did not address whether this variable did not also affect the
calculation of coefficients for the program categories at issue.\58\
However, the absence of any hard evidence of the extent of this problem
on the measurement of the coefficients makes this deficiency difficult
to quantify. Accordingly, this criticism leads the Judges to consider
the accuracy of the estimates in Professor Crawford's nonduplicated
analysis to be less certain, and the Judges thus will look to Professor
Crawford's duplicated-minutes regression results when incorporating his
analysis and conclusions into their determination of the appropriate
allocation of shares.
---------------------------------------------------------------------------
\58\ The Judges note that although the shares are not
drastically different in the two models, the shares for CTV, who
engaged Dr. Crawford, increased more substantially under his
nonduplicated analysis, i.e., the approach as to which he expressed
uncertainty under cross-examination than any other program category.
Further, a number of categories saw either a decline or essentially
no change in their shares in the nonduplicated model compared to the
duplicated model. Compare Crawford CWDT Fig. 17 with Crawford CWDT
Fig. 20 (both reproduced supra).
---------------------------------------------------------------------------
l. Overfitting
The SDC contended that Professor Crawford's regression methodology
suffered from a problem known as ``overfitting.'' In econometrics, and
in statistics more broadly, overfitting occurs when the regression
attempts to ``estimat[e] too large a model with too many parameters.''
C. Brooks, Introductory Econometrics for Finance 690 (3d ed. 2014). See
also T. Powell & P. Lewecki, Statistics: Methods and Applications 681
(2006) (``overfitting'' is ``[w]hen [a regression] produc[es] a curve .
. . that fits the data points well, but does not model the underlying
function well [because] its shape is being distorted by the noise
inherent in the data.'').
On the other hand, when an econometrician attempts to avoid
overfitting, he or she must be mindful not to eliminate potentially
important data from the regression. Otherwise a different problem--
underfitting--can arise. To wit:
There is actually a dual problem to overfitting, which is called
underfitting. In [an] attempt to reduce overfitting, the [modeler]
might actually begin to head to the other extreme and . . . start to
ignore important features of [the] data set. This happens when [the
modeler] choose[s] a model that is not complex enough to capture
these important features . . . . [T]his incredibly important problem
is known as the bias-variance dilemma[ \59\] [and] is just as much
an art as it is a science.
\59\ The ``bias-variance dilemma'' refers to the problem that
arises when a model that tends to overfitting (too few observations
per variable) will have a low bias in the regression coefficient
(i.e., a regression line based on the data will tightly fit the data
points) but will suffer from a relatively higher variance, (i.e., a
relatively higher expected distance from the variable from its true
value. See ABA Econometrics, supra note 22, at 275-76 nn.13 & 14
(``The higher the variance, the less precise is the estimate [i.e.,]
the less the data say about the true value of the coefficient. . . .
A biased estimate differs systemically from the true value, rather
than departing from the true value only because of sampling
error.'').
---------------------------------------------------------------------------
D. Geng and S. Shih, Machine Learning Crash Course: Part 4--The Bias-
Variance Dilemma, ML@B, The Official Blog of Machine Learning @Berkeley
(July 13, 2017), available at https://ml.berkeley.edu/blog/2017/07/13/tutorial-4/(last visited May 1, 2018) (emphasis added).
In the present case, the SDC argued that Professor Crawford's
regressions suffered from overfitting for several reasons.
First, because he used ``system-accounting period fixed effects [as
distinguished from the subscriber group level], Professor Crawford's
regression employs more than 7,300 variables [and] approximately 26,000
observations . . . only about 3.55 observations per variable.'' SDC PFF
] 109 (citing Crawford CWDT at C-3; 2/28/18 Tr. 1646 (Crawford)).
According to the SDC, Professor Crawford acknowledged that ``[a]s a
rule of thumb, fewer than ten observations per variable can yield a
likelihood of overfitting.'' SDC PFF ] 111 (citing 2/28/18 Tr. 1461
(Crawford)). Because Professor Crawford had less than ten observations
per variable (3.55), the SDC argued that Professor Crawford's
regression suffered from overfitting, calling into question the
usefulness of the estimates Professor Crawford produced.
However, Professor Crawford denied that he endorsed this test, and
the Judges agree with Professor Crawford, based on the following cross-
examination colloquy:
SDC COUNSEL: [H]ave you ever heard of the One-in-Ten Rule? One-
in-Ten?
PROFESSOR CRAWFORD: Not--if you could describe it, perhaps I
have.
SDC COUNSEL: A rule of thumb--not saying it is precise--a rule
of thumb that you should have at least ten observations per . . .
per coefficient.
PROFESSOR CRAWFORD: I have not heard that specific rule, but I
understand the idea behind it. And generally the idea behind that is
if you don't have ten observations per one tends to get imprecise
parameter estimates. . . . I don't subscribe to the One-in-Ten Rule.
2/28/18 Tr. 1461, 1463 (Crawford) (emphasis added). Nowhere in this
testimony did Professor Crawford indicate a familiarity with the
supposed ``one-in-ten'' rule in counsel's question, and Professor
Crawford instead
[[Page 3566]]
attempted merely to explain his understanding of this heuristic as the
SDC's counsel had presented it.\60\ Without a more developed record
regarding the existence and applicability of this one-in-ten heuristic,
the Judges cannot find that Professor Crawford's use of ``only'' 3.55
observations per variable would have a negative impact on his
regression methodology. Moreover, because the SDC presented this
principle as a heuristic rather than a rule, the underdeveloped nature
of the record is of even greater importance. Finally, because the
problem of overfitting versus underfitting (the bias/variance dilemma
discussed supra) appears to be a judgment call for the econometric
modeler, the Judges are loath to impose this heuristic as an
invalidating principle in connection with Professor Crawford's
regression.
---------------------------------------------------------------------------
\60\ Moreover, Professor Crawford's testimony was at odds with
what the SDC's counsel actually meant by the ``one in ten'' rule as
it relates to overfitting. In the immediately subsequent testimony,
the SDC's counsel challenged Professor Crawford's opinion that ``the
idea behind that is if you don't have ten observations per
coefficient, one tends to get imprecise parameter estimates.'' Id.
The SDC's counsel then disagreed with the expert witness, Professor
Crawford, and asserted that ``[a]n overfitted model will be able to
estimate the parameters [a]nd you might not be able to project it to
other data, but will be able to estimate the parameters with great
precision.'' Id. As the introductory discussion of overfitting (set
forth supra) makes clear, the SDC's counsel was correct in his
presentation of the overfitting problem, but that is unrelated to
the fact that Professor Crawford's testimony demonstrated his
unfamiliarity with both the ``one-in- ten'' heuristic and its
alleged econometric importance. (The Judges are not suggesting that
a ``one-in-ten'' heuristic is not utilized by econometricians, but
rather note that the record does not establish its existence and its
applicability in this proceeding.).
---------------------------------------------------------------------------
Relatedly, Professor Crawford only acknowledged that overfitting
would be a problem if there were a one-to-one ratio of variables to
observations that would perfectly predict the variables, but with very
wide confidence intervals. Professor Crawford testified that, in his
opinion, his confidence intervals were not so wide as to diminish the
value of his regression results. See 2/28/18 Tr. 1460-62 (Crawford).
The Judges agree that Professor Crawford did not go further than
acknowledging that an absolute identity in the number of variables and
observations would create an overfitting problem.
As a more theoretical rejoinder, Professor Crawford asserted that
concerns with regard to overfitting apply to ``prediction''
regressions--not ``effects'' regressions such as Professor Crawford's
regressions and all the Waldfogel-type regressions introduced in this
proceeding. Id. at 1460, 1463.\61\ However, Professor Crawford did not
provide a sufficient explanation as to the disparate impacts of
overfitting in a ``prediction'' regression and an ``effects''
regression to allow the Judges to find that the relatively low number
of observations per variable is less important in his ``effects''
regression.
---------------------------------------------------------------------------
\61\ The Judges discussed the distinction between an ``effects''
regression and a ``prediction'' regression at length, supra, section
0.
---------------------------------------------------------------------------
Second, according to SDC, Professor Crawford's total observations
were diminished, and his regressions compromised, because he
``effectively discarded'' approximately 15% of his observations by
disregarding observations from systems with a single subscriber group,
which totaled ``approximately half of all systems in his data set'', by
virtue of his reliance on ``system-accounting period fixed effect.''
SDC PFF ] 110 (citing 2/28/18 Tr. 1458 (Crawford); Crawford CWDT at 21,
Fig. 10; 3/8/18 Tr. 2710-11 (Erdem)).
The Judges are troubled by CTV's failure to respond expressly to
this criticism.\62\ Similarly, the Judges are troubled that CTV neither
cited nor addressed the SDC's criticism that Professor Crawford did not
test his model for overfitting.
---------------------------------------------------------------------------
\62\ In its Response to the SDC's PFF, CTV helpfully cited (and
reproduced) each numbered paragraph of the SDCPFF, and conspicuously
absent from that response is any reference to ] 110.
---------------------------------------------------------------------------
The final reason the SDC criticized Professor Crawford's analysis
for overfitting was their claim that he essentially selected his
regression model out of ``more than one'' model he had previously run.
SDC PFF ] 118 (citing 3/1/18 Tr. 1888 (Bennett)). More particularly,
the SDC contended that Professor Crawford and his team disregarded at
least two regressions. First, Professor Crawford allegedly discarded a
regression without the top-six multiple-system operator (MSO)
interaction variables that were in his final model. 2/28/18 Tr. 1642-44
(Crawford). Second, the SDC asserted that Professor Crawford
disregarded ``a model run at the system level instead of the subscriber
group level,'' i.e., a model that would not have treated system-
accounting period data as a fixed effect. 3/1/18 Tr. 1888 (Bennett).
See SDC PFF ] 113 (relying on Crawford and Bennett testimony).
According to the SDC, Professor Crawford's rejection of several
models before deciding on the one he presented in evidence in this
proceeding indicated a potential likelihood of overfitting in the
regression model in evidence through his consumption of ``phantom
degrees of freedom,'' i.e., ``variables that were tried and
rejected''--rather than included in the regression model in
evidence.\63\ SDC PFF ] 113 (citing 3/8/18 Tr. 2711 (Erdem)).
---------------------------------------------------------------------------
\63\ ``Degrees of freedom'' are defined ``[i]n multiple
regression analysis, [as] the number of observations minus the
number of estimated parameters.'' Wooldridge, supra note 34, at 837.
Accordingly, statisticians understand ``degrees of freedom'' to be
measures of how much can be learned from a regression, with the
quality of knowledge improved by increasing the number of
observations, reducing the number of estimated parameters, or by
some combination of both that serves to widen the difference between
the number of observations and parameters. See What are degrees of
freedom?, https://support.minitab.com/en-us/minitab/18/help-and-how-to/statistics/basic-statistics/supporting-topics/tests-of-means/what-are-degrees-of-freedom/(last visited June 14, 2018). Dr. Erdem
does not define a ``phantom degree of freedom'' except to describe
it as an ``economic concept . . . not a statistic.'' 3/8/18 Tr. 2711
(Erdem). More particularly, a ``phantom degree of freedom'' can be
generated when the modeler reduces the number of parameters by his
or her rejection of other models that would have added a greater
number of parameters--nothing more has really been learned but the
explicit number of degrees of freedom appears larger, as an artifact
(a ``phantom'') arising from the econometrician's rejection of
models containing additional parameters. See Minitab Blog Editor,
Beware of Phantom Degrees of Freedom that Haunt Your Regression
Models!, The Minitab Blog (Oct. 29, 2015), http://blog.minitab.com/blog.
---------------------------------------------------------------------------
The SDC claimed this issue is important in the context of its
overfitting criticism because, as Professor Crawford's testimony
indicated, it is not generally good econometric practice to ``to try a
regression, to reject some variable or to reject a form, and then try
another specification and find you get a statistically improved
result.'' SDC PFF ] 115 (citing 2/28/18 Tr. 2109 (Crawford)). According
to Dr. Erdem when such an approach is taken, ``the reliability of the
coefficients at the end of that model selection process is
questionable.'' 3/8/18 Tr. 2711 (Erdem).
In response, CTV noted that it had addressed the issue of the first
supposed ``discarded'' regression without the top-six MSO interaction
variables, in its opposition to a Motion to Strike filed by SDC. In
that Opposition, CTV made particular note of Professor Crawford's
written direct testimony in which he explained why his regression
analysis did not originally treat the interaction of these top-six MSOs
as a fixed effect. See Crawford CWDT ] 166 (``Dummy variables for each
of the six largest MSOs--Comcast, Time Warner, AT&T, Verizon, Cox, and
Charter--are included as covariates to capture potential differences in
factors not included in the econometric model that could shift demand
for bundles that include imported distant broadcast signals.'').
CTV further referred to the Judges' Order Denying SDC Motion to
Strike
[[Page 3567]]
Testimony of Gregory S. Crawford (Crawford Order), which credited CTV's
position that Professor Crawford had not run such an alternative course
of action by generating a regression and then discarding it, but rather
had decided to add the top-six MSO effects as ``fixed effects'' in the
course of developing his regression approach, in order better to
isolate the correlation, if any, between the explanatory (independent)
variables at issue in this proceeding--the different programming
categories--and the dependent variable, i.e., total royalties. As the
Judges explained in the Crawford Order:
Dr. Crawford's WDT . . . explained how he first described
differences that were observed in the data among the six largest
MSOs in terms of their average receipts per subscriber. CTV Opp'n at
10-11 and Ex. 2004, Figure 6. Dr. Crawford's WDT also explained that
these differences may suggest other important differences among
these large MSOs regarding their signal carriage strategies,
pricing, and other relevant dimensions. CTV Opp'n at 11; Ex. 2004 ]
61. Dr. Crawford also described a regression without the six MSO
Interaction variables. Ex. 2004 ] 61 (unobserved differences in
average revenue per subscriber could bias estimates of relative
value of different programming).
Crawford Order at 5.
The Judges find that the SDC's criticism of Professor Crawford's
models for consuming ``phantom degrees of freedom'' is essentially a
restatement of Dr. Erdem's general claim of overfitting. Accordingly,
this argument does not add a new basis for reducing the weight the
Judges place on Professor Crawford's regression analysis.\64\
---------------------------------------------------------------------------
\64\ Although the Judges denied the SDC's Motion to Strike, they
indicated in the Crawford Order that they would consider whether the
absence of that prior work diminished the weight they might
otherwise give to the regression methodology that Professor Crawford
presented at the hearing. After considering the entire record, the
Judges do not reduce the weight they accord to Dr. Crawford's
regression analysis based on this argument.
---------------------------------------------------------------------------
On balance, the Judges find that there may be some degree of
overfitting in Professor Crawford's regression analyses that he did not
adequately explain. It further appears that this problem was the result
of a tradeoff, arising from Professor Crawford's use of a subscriber
group analysis and thus a reliance on system-accounting period fixed
effects that, as the SDC noted, reduced the number of observations in
Professor Crawford's data set. Although such potential overfitting may
exist, there is nothing in the record to demonstrate sufficiently that
this problem would support a decision to diminish the judges' reliance
on Professor Crawford's regression analysis.\65\
---------------------------------------------------------------------------
\65\ Also, Professor Crawford's use of data from the entire
population of Form 3 CSOs provided him with a wealth of data that
mitigated a potential problem with regard to potential overfitting
arising from sampling that provided too little data relative to the
number of parameters. Crawford CWDT ] 123.
---------------------------------------------------------------------------
3. Program Suppliers' Criticisms of Dr. Crawford's Analysis
a. Assumption Regarding CSO Behavior
Sue Ann Hamilton, an industry expert, testified that Professor
Crawford made a significant error (one that would apply to any
Waldfogel-type regression) when he posited that CSOs make decisions
regarding distant retransmission based on their intention to maximize
profits by selecting those stations with an optimal bundle of
programming. Corrected Written Rebuttal Testimony of Sue Ann Hamilton,
Trial Ex. 6009, at 13-14 (Hamilton CWRT). Rather, Ms. Hamilton
testified, a CSOs' selection of stations for distant retransmission is
marked by inertia, not by an affirmative analysis and weighing of
alternative stations. Id. She identified two reasons for CSO inertia.
First, distant retransmission costs represent a non-material
expenditure for CSOs compared with their other more expensive
programming and carriage decisions. Id. at 9. Second, she testified
that CSOs are more concerned with losing existing subscribers if they
drop certain stations and the associated programs than they are with
whether or not any new retransmitted station and its associated
programs might entice new subscribers.\66\ Id. In industry jargon, CSOs
are more concerned with ``legacy distant signal carriage'' than with
adjusting the roster of distantly retransmitted stations. Id. at 15.
Thus, Ms. Hamilton implied, any correlation between program categories
and royalties is spurious, because it is ``inconsistent with [her]
understanding of how CSOs actually make distant signal carriage
decisions.'' Id.\67\
---------------------------------------------------------------------------
\66\ Ms. Hamilton's assertion that CSOs are more interested in
satisfying niche signal viewers than with attracting and retaining
new subscribers is contrary to assumptions underlying much of the
survey analysis of CSO attitudes and valuations. Survey analyses are
described in Section III, infra.
\67\ Ms. Hamilton also criticized Professor Crawford for
assuming duplicated network minutes had zero value, because: (1)
Some people prefer to watch a program at times other than when aired
by a local network affiliate and (2) all programming has a value
greater than zero to a CSO. Id. at 13-14. However, Professor
Crawford explained in his oral testimony that: (1) He only dropped
duplicated network programming that was aired at the same time as
the local network programming and (2) Ms. Hamilton's conclusory
assertion that all programming has value to a CSO flies in the face
of the economic principle that consumers value only one version of
perfectly substitutable goods. 2/28/18 Tr. 1426 (Crawford).
---------------------------------------------------------------------------
The Judges find that Ms. Hamilton was a knowledgeable and credible
witness, particularly with regard to the de minimis impact of distantly
retransmitted stations on CSOs and the importance of ``legacy
carriage.'' Moreover, the Judges take note that CSO time and effort are
themselves finite resources (opportunity costs), and, as Ms. Hamilton
implied, it would behoove a rational CSO to expend more of those
resources making carriage and programming decisions with a greater
financial impact.\68\
---------------------------------------------------------------------------
\68\ Given the low value of retransmitted stations, a CSO might
rationally emphasize the value of ``legacy carriage'' as a heuristic
(without further analytical effort), assuming as Ms. Hamilton
implies, that eliminating a distantly retransmitted legacy station
and its programs is more likely to cause a loss in subscribers than
a change in station lineup is likely (without further and costly
analytical effort) to increase the number of subscribers.
---------------------------------------------------------------------------
However, the Judges do not find that the relative unimportance of
distantly retransmitted stations to a CSO deprived the regression by
Professor Crawford, or any of the regressions in evidence, of value in
this proceeding. If the reasons articulated by Ms. Hamilton caused CSOs
to emphasize legacy carriage over potential increases in value from
adding or substituting different local stations for distant
retransmission, then otherwise well-constructed regressions should
capture the relative values of those legacy-based decisions. The Judges
are mindful that regression analysis is of benefit because it looks for
a correlation between economic actors' choices (the independent
explanatory variables) and the dependent variables as potential
circumstantial evidence of a causal relationship, but it does not
purport to explain what lies behind such a potential causal relation.
Thus, Ms. Hamilton has not so much criticized regression analyses as
she has provided an answer to a different question.
Indeed, if legacy-based decision-making is prevalent, the Judges
would expect to see relatively stable shares over the royalty years
encompassed within and across the Allocation/Phase I proceedings. In
fact, the record does reflect relative stability. See, e.g., Crawford
CWDT ]] 12, 15 (in his two regressions in this proceeding, ``the
estimated parameters underlying these marginal values are stable across
years . . . .''), ] 39, Table V-3. It thus appears that past decision-
making has to an extent generally locked in (through an emphasis on
legacy carriage) decisions as to the carriage of distantly
[[Page 3568]]
retransmitted stations for the 2010-2013 period.
In sum, therefore, Ms. Hamilton's testimony, while informative and
credible, does not diminish the value of Professor Crawford's
regression or, for that matter, any other Waldfogel-type regression.
b. Minimum Fee Issue
Dr. Jeffrey Gray criticized Professor Crawford's regression because
the analysis included in the dependent variable royalties that are paid
as part of the statutorily mandated minimum fees. Gray CWRT ]] 17-18.
Any Form 3 cable system must pay a system-wide minimum fee equal to
1.064% of its gross receipts into the royalty pool for distantly
retransmitted stations, even if it does not retransmit any stations to
distant markets, up to the retransmission of one full DSE. 17 U.S.C.
111(d)(1)(B)(i) and (ii). Dr. Gray asserted that, consequently, the
data used by Professor Crawford is not informative, because the minimum
fee cost is decoupled from the marginal economic decision regarding the
retransmission of the first DSE. Gray CWRT ]] 20-22.
Dr. Gray noted that approximately 50% of CSOs did retransmit more
than one DSE, and thus voluntarily paid a royalty greater than the
minimum fee. Dr. Gray acknowledged that the data regarding this
subgroup of CSOs was informative because these CSOs had made a
discretionary choice to incur additional royalty charges in exchange
for carriage of additional distantly retransmitted stations and their
constituent programs. Accordingly, he ran what he described as
Professor Crawford's regression using only the CSOs that paid more than
the minimum fee, and his results were different from Professor
Crawford's results. However, although Dr. Gray had characterized his
work as a rerun of Professor Crawford's regression, at the hearing Dr.
Gray confirmed that he had been ``unable to replicate'' Dr. Crawford's
regression. 3/14/18 Tr. 3739 (Crawford).\69\
---------------------------------------------------------------------------
\69\ Not only was Dr. Gray unable to replicate Professor
Crawford's work, Professor Crawford also challenged Dr. Gray's
assertion that he otherwise faithfully reran Professor Crawford's
regression. 2/28/18 Tr. 1422 (Crawford) (asserting that Dr. Gray
changed a ``key element of my regression analysis . . . the
subscriber group variation [by] aggregate[ing] that subscriber group
level information up to the level of the systems, which means . . .
he cannot do fixed effects anymore . . . and he then adds additional
variables.'').
---------------------------------------------------------------------------
In any event, Dr. Gray's analysis resulted in the allocations among
program categories--presented in the table below alongside Professor
Crawford's allocations (and Dr. Gray's viewership-based allocations
discussed elsewhere in this Determination):
Table 4--Impact of Accounting for Minimum Fees Requirement on Crawford Royalty Shares, 2010-2013
----------------------------------------------------------------------------------------------------------------
Distant
Crawford Crawford- viewing
Claimant category royalty Shares modified royalty shares
royalty shares (%)
(1) (2) (3)
----------------------------------------------------------------------------------------------------------------
CCG............................................................. 3.51 5.46 3.70
CTV............................................................. 16.50 13.54 13.50
Devotionals..................................................... 0.60 0.75 1.44
Program Suppliers............................................... 23.44 61.19 45.43
PTV............................................................. 17.72 19.06 33.04
JSC............................................................. 38.23 0.00 2.89
----------------------------------------------------------------------------------------------------------------
Gray CWRT ] 24, Table 3.
In response, Professor Crawford pointed out that, contrary to Dr.
Gray's assertions, Dr. Crawford's regression did not ignore the impact
of the minimum fee, because he included an indicator variable as a
control, subsumed within his fixed effects variables, to reflect
whether the minimum fee was paid at the system level. 2/28/18 Tr. 1422
(Crawford). Thus, Professor Crawford maintained that he had already
accounted for the minimum fee effect. Accordingly, Professor Crawford
argued that Dr. Gray's analysis merely attempted to account for minimum
fee systems in a different way--by omitting those systems instead of
replicating Professor Crawford's regression that used control variables
and fixed effects to account for the minimum fee paying systems.\70\
---------------------------------------------------------------------------
\70\ Professor Crawford testified that after reviewing the
rebuttal testimony, he did a ``test'' in which he claimed to have
``dropped the minimum fee systems from the regression analysis and
re-ran the regression,'' which showed that the implied royalty
shares were ``very, very close: to his own original results. . ..''
2/28/18 Tr. 1424 (Crawford). However, Professor Crawford and CTV did
not produce this regression because, as CTV's counsel acknowledged
in response to a rebuttal, ``this is not a new analysis [and] [w]e
are not presenting any numbers here.'' 2/28/18 Tr. 18 (John Stewart,
CTV counsel).
---------------------------------------------------------------------------
Dr. Gray is correct with regard to his general principle that a
CSO's decision to distantly retransmit any particular station, when
that CSO is otherwise obligated to pay the minimum royalty fee, does
not indicate a direct correlation between the decision to retransmit
and the decision to incur a royalty obligation. By contrast, when a CSO
decides to incur an increase in its marginal royalty costs by
retransmitting more than one DSE, that decision reveals the CSO's
preference to incur the royalty cost in exchange for the perceived
value of the distantly retransmitted station and the programs in that
station's lineup.
As Dr. Gray noted, the minimum royalty fee is somewhat akin to a
``tax'' that is paid regardless of whether the CSO decided to distantly
retransmit a local station. 3/14/18 Tr. 3704 (Gray). Nonetheless, the
CSO still has several choices to make, because it will receive
something of potential value, i.e., distantly retransmitted stations,
in exchange for the ``tax.'' The first choice is binary; should it
retransmit any station or no station? As Dr. Gray noted, during the
2010-2013 period, on average 527 out of the 1,004 Form 3 CSOs analyzed
(52.5%) chose to retransmit the exact or fewer number of signals than
the regulated fees permitted; 83 paid the minimum fee yet elected not
to retransmit any local stations. Gray CWRT ] 17. Those decisions
reveal that the CSO has concluded (whether by analysis or resort to a
heuristic) that any of the marginal costs (physical or opportunity)
associated with retransmission likely exceed the value to the CSO of
such retransmission, even accounting for minimum royalties, which the
CSO must pay in any event.
[[Page 3569]]
These statistics also reveal that many CSOs decided to retransmit
stations when they were obligated to pay only the minimum royalty.
Although there is no marginal royalty cost associated with this
decision, the CSO's decision as to which stations to retransmit remains
a function of choice, preference, and ranking.\71\ Thus, the CSO in
this context would still have the incentive to select distant local
stations for retransmission that are more likely to maximize CSO
profits, through either an increase in subscribership or, as Ms.
Hamilton emphasized, by avoiding the loss of subscribers through the
preservation of ``legacy carriage'' through the non-analytical
heuristic of maintaining the status quo.\72\
---------------------------------------------------------------------------
\71\ In constructing a hypothetical market, the Judges assume
CSO rationality or bounded rationality, at the least. ``Bounded
rationality'' means that economic actors behave rationally (e.g.,
preferring potential profits to possible losses), but that
rationality is inevitably limited by their lack of full information
or the resources and ability to obtain full information necessary to
make a completely (``unbounded'') rational decision. See C.
Sunstein, Behavioral Law & Economics 14-15 (2000).
\72\ A more homespun analogy is perhaps instructive. Consider a
child who has misbehaved and is thus punished by her parents who
prohibited her from playing outside, as is her preference. Instead,
she is sent by her parents to her room for the evening, where she is
permitted to watch television (either the offense is not so great in
this example as to warrant a suspension of TV privileges or the
child has relatively permissive parents). The child has been
compelled to pay a cost (confinement to her room) and precluded from
her first choice (no confinement). If watching television is her
only (or next best) option given confinement, she will rationally
select the programs that provide her with the most utility. The fact
that she was compelled to remain in her room would not provide her
any incentive to abandon her order of preference as to the programs
she would watch, even though she would not watch any of them but for
the ``tax'' imposed by her parents (this analogy assumes that she
would not refuse to watch television, as ``cutting off her nose to
spite her face'' is assumed to be an irrational response). The CSO
that is ``confined'' to a market in which the minimum royalty fee is
imposed likewise rationally would make the best of a bad situation
and retransmit stations based on the capacity of the station to
increase CSO utility/profits, that is, assuming marginal non-royalty
costs were not prohibitive.
---------------------------------------------------------------------------
There are substantial economic bases for this finding. Because the
``tax'' of the minimum fee is paid regardless of whether distant
retransmission occurs, that ``tax'' is also in the nature of a sunk
cost. Fundamental economic analysis provides that a seller should
ignore sunk costs when making marginal decisions (although they should
try to recoup these costs if the buyers' willingness-to-pay allows it).
Nonetheless, a CSO that decides to distantly retransmit a station when
the marginal royalty cost is zero has revealed that the particular
station contains programming that would increase marginal value to that
CSO, over and above the next best alternative ``retransmittable'' local
station and above any other marginal costs (e.g., physical
retransmission costs or the opportunity cost of foregoing a different
type of cable channel in the CSO's channel lineup).
Finally, Dr. Gray's emphasis on the CSOs that retransmit more than
one DSE is misleading. Those other CSOs that pay only the minimum
royalty fee and elect to distantly retransmit one station might have
elected to pay a positive fee in the absence of the minimum fee. For
example, assuming Program Suppliers' programs were more valuable to a
CSO than the minimum fee and disproportionately more valuable than any
other program category, that CSO would have retransmitted a station
that disproportionately included Program Supplier content and willingly
paid the minimum fee (or more). Dr. Gray's criticism fails to address
this issue.
With regard to Dr. Gray's own regression, run for the first time in
rebuttal, the Judges are not surprised that his different regression
approach would yield different results. However, the Judges do not rely
on methodological approaches proffered for the first time in rebuttal,
except to the extent they appropriately demonstrate defects in another
party's approach. Because Dr. Gray acknowledged that he could not
replicate Professor Crawford's regression and because Dr. Gray
therefore utilized a different approach, the Judges do not find that
Dr. Gray's critique as it related to the minimum fee issue was
sufficient to discredit Professor Crawford's approach.\73\
---------------------------------------------------------------------------
\73\ An expert economic witness, Professor George, who otherwise
approved of Professor Crawford's analysis, notes that the treatment
of minimum fee only systems by Professor Crawford generally resulted
in a tradeoff between accuracy and bias. Specifically, Professor
George testified that lumping together CSOs paying only the minimum
fee with other CSOs (as Professor Crawford did) ``introduces some
uncertainty [and] wider confidence intervals,'' but, on the other
hand, Dr. Gray introduces ``bias'' because he has ``pull[ed] out
systems . . . where their choices are very valid.'' 3/5/18 Tr. 2045
(George). Because the Judges have found Professor Crawford's
confidence intervals to be relatively narrow, Professor George's
testimony in this regard does not affect the Judges' reliance on
Professor Crawford's analysis.
---------------------------------------------------------------------------
4. Conclusion Regarding Professor Crawford's Regression Analysis
Not only did Professor Crawford sufficiently respond to the
criticisms of his regression analysis, that analysis is based on a
number of other factors as to which no criticisms were leveled. First,
he used the universe of all programming on all distant signals, rather
than a sampling, thus avoiding any problems that may be associated by
improper sampling or inadequately sized samples. 2/28/18 Tr. 1186
(Crawford). Second, by using data and royalties at the subscriber group
level, his regression analysis related more specifically to programs
and signals actually available to subscribers and provided more
variation and observations than past regressions. 2/28/18 Tr. 1512,
1517-19, 1661 (Crawford). Third, his use of a fixed effects approach
avoided the criticism that he had omitted key variables. Crawford CWDT
] 107; 2/28/18 Tr. 1398 (Crawford). Fourth, the confidence intervals
for his proposed shares were relatively narrow at the 95% confidence
level (i.e., at a .05 significance level). Crawford CWDT ]] 117 and
176, Tables 23 & 24. Fifth, Professor Crawford acknowledged the
potential problem that his fixed effects could lead to the ``costs'' of
higher standard errors and wider confidence intervals (and, as
Professor George noted, with specific reference to the minimum fee
issue), but he was able to mitigate that effect with his rich data set,
so that his parameters remained relatively precise. Crawford CWDT ]
123. Finally, unlike the other regressions, Professor Crawford does not
estimate any negative coefficients for the coefficients of interest in
this proceeding, which makes his regression analysis (especially his
duplicated analysis that also had no negative coefficients for network
programming) more of a stand-alone estimate of relative value and less
in need of reconciliation with the survey analysis. Thus, on balance,
the Judges find Professor Crawford's regression analysis, especially
his duplicate-minutes approach, to be highly useful in estimating
relative values in this proceeding.
C. Dr. Israel's Regression Analysis
1. Introduction
On behalf of the Joint Sports Claimants, its economic expert, Dr.
Mark Israel, conducted a regression also in the general form of a
Waldfogel-type regression, but with minor modifications intended to
improve the reliability of the methodology. Written Direct Testimony of
Mark Israel, Trial Ex. 1003, ]] 23, 25 (Israel WDT). Dr. Israel's
primary purpose was to determine whether such a regression would
corroborate the results of the 2004-05 and the 2010-13 Bortz Surveys.
He concluded that the ``observable marketplace behavior'' he had
analyzed did indeed corroborate the results of both Bortz Surveys. Id.
] 8. Dr. Israel further testified that, if the Judges
[[Page 3570]]
were to find that the 2010-13 Bortz Survey did not support a finding of
relative market value, his and Professor Crawford's respective
regressions constituted the best alternative evidence of such value. 3/
12/18 Tr. 3079 (Israel).\74\
---------------------------------------------------------------------------
\74\ In addition to performing a regression analysis, Dr. Israel
also reviewed data relating to the economics of a different market--
that in which large cable networks generally, and TNT and TBS
specifically, bought sports and other programming. The Judges
discuss that analysis infra.
---------------------------------------------------------------------------
2. Dr. Israel's Regression
Dr. Israel analyzed royalties CSOs paid over a three-year period,
2010-2012, rather than the full four-year period at issue in this
proceeding, 2010-2013. Id. ] 7. Dr. Israel testified that he did not
analyze the full 2010-2013 four-year period because he had begun his
analysis when the proceeding was limited to the three-year 2010-2012
period. However, he testified that he was able to confirm the accuracy
of his regression estimates against the results from the Bortz Survey
that covered all four years. He also noted that his results
corresponded closely to the results that Professor Crawford obtained in
his regression, which spanned the full four-year period. 3/12/18 Tr.
2838-40 (Israel).
Dr. Israel, like Professor Crawford, utilized the royalty data from
the ``Form 3'' CSOs, i.e., the larger CSOs, which paid the largest
dollar amount of royalties for distantly retransmitted stations by
virtue of the large amount of ``gross receipts'' they earned from their
cable operations. Israel WDT ] 9.
Referring to the regulated nature of the cable market, Dr. Israel
noted: ``There is no market price for distant signal programming to use
in assessing relative marketplace value.'' Id. ] 16. Dr. Israel further
noted that, applying the principles laid out in prior proceedings,
``relative marketplace value'' must be estimated by consideration of
evidence as to what royalties would be paid for different categories of
programming in a ``hypothetical free market.'' Id. To ascertain that
value, and consistent with his understanding of prior determinations,
Dr. Israel focused on the relative value of program categories to the
buyers, i.e., CSOs. Id.\75\
---------------------------------------------------------------------------
\75\ Dr. Israel did not consider the relative value of program
categories from the perspective of the hypothetical sellers, which
he identified as the stations retransmitting the programs in a
bundled signal. 3/12/18 Tr. 3064 (Israel).
---------------------------------------------------------------------------
To assemble the specifications of his regression model, Dr. Israel
applied the essentials of a Waldfogel-type regression. That is, he
tested to find a correlation between: (1) Royalties paid by CSOs (the
dependent variable) and (2) minutes of programing in each category of
programming as established in this proceeding (the independent/
explanatory variable). He utilized control variables to hold constant
other potential drivers of CSO royalty payments, itemized infra. Id. ]
22.
However, he altered his approach from the Waldfogel regression
approach in the following important ways:
To reflect the fact that not all subscriber groups among a
CSO's total subscriber base received any given distant signal, Dr.
Israel prorated each signal ``based on the fraction of the number of
subscribers who received it . . . by using the variable in the CDC data
called `Prorated DSE' as a measure of the prorated distant signal
equivalents that each distant signal represents for each CSO--
Accounting Period.'' Id. ] 26.\76\
---------------------------------------------------------------------------
\76\ Thus, Dr. Israel's regression differs from Professor
Crawford's regression in that Professor Crawford analyzed the
relationship between royalties and program categories at the
subscriber group level, whereas Dr. Israel ran the regression at the
CSO level, using CDC data that prorated the DSE to reflect the
proportion of CSO subscribers who received the distant signal.
Israel WDT ] 27.
---------------------------------------------------------------------------
To account for the retransmission of non-compensable
``Network Programming'' minutes in the estimates, Dr. Israel included
those minutes to ``effectively act'' as a control variable, thus
excluding them from the calculation of shares of the royalty fund. That
is, he included these minutes in his regression because they are in
fact retransmitted and ``therefore are part of the cost-benefit
analysis that a [CSO] undertakes when deciding whether or not to carry
[a] distant signal . . . [h]ence explaining total royalty payments
[even though] they are not compensable minutes in this proceeding.''
Id. ] 27.
To improve the quality of his estimates, Dr. Israel
utilized a larger sample than employed in the Waldfogel regression.
Specifically, Dr. Israel used data from a random sample of 28 days in
each six-month accounting period in his 2010-2012 analysis, a 33%
increase in the number of sample days (21) utilized in the Waldfogel
regression. Id. ] 30.\77\
---------------------------------------------------------------------------
\77\ Dr. Israel made note of two other adjustments he made to
his regression that caused it to differ from the Waldfogel
regression. First, he eliminated a ``Mexican Stations'' category
because no such category was identified in this proceeding. Israel
WDT ] 29. Second, Dr. Israel grouped the programs from ``low power''
stations according to their appropriate program categories, rather
than carving out a miscellaneous category for ``low power''
stations, as had been done in the Waldfogel regression. Israel WDT ]
31.
---------------------------------------------------------------------------
Dr. Israel controlled for other independent variables in
essentially the same manner as in the Waldfogel regression, by
including the following control variables in his regression model:
Number of CSO subscribers from the previous accounting
period
Number of activated channels for the CSO in the previous
accounting period
Count of broadcast channels for the CSO
Indicator for whether a CSO pays the special 3.75 percent
rate royalty fee
Indicator for whether or not the CSO pays the minimum
statutory payment
Average household income for the CSO's Designated Market
Area (DMA)
Indicators for the accounting period of each observation
Id. ] 33.
Through these specifications, Dr. Israel stated that he was able to
answer what he characterized as the fundamental question: ``How much do
CSO royalty payments increase with each additional minute of each
category of programming content?'' Id. ] 34.
Applying his regression model, Dr. Israel made the following
estimations:
Table 5--Israel Regression Model Results
------------------------------------------------------------------------
Regression model
Variables all categories
------------------------------------------------------------------------
Minutes of Sports Programming........................ ** 4.836
(2.466)
Minutes of Program Suppliers Programming............. *** 0.469
(0.104)
Minutes of Commercial TV Programming................. *** 1.010
(0.355)
Minutes of Public Broadcasting Programming........... ** 0.660
(0.306)
[[Page 3571]]
Minutes of Canadian Programming...................... *** -0.973
(0.212)
Minutes of Devotional Programming.................... *** -0.701
(0.246)
Minutes of Network Programming....................... *** -0.985
(0.290)
Minutes of Other Programming......................... ** 0.916
(0.462)
Number of Subscribers (Previous Accounting Period)... *** 1.351
(0.0601)
Number of Activated Channels (Previous Accounting *** 141.8
Period)............................................. (18.73)
Median Household Income in Designated Marketing Area. *** 1.339
(0.286)
Count of Broadcast Channels.......................... -493.5
(326.5)
Indicator for Special 3.75% Royalty Rate............. *** 41,918
(4,711)
Minimum Payment Indicator............................ *** -16,501
(3,689)
Observations......................................... 5,465
R-squared............................................ 0.692
------------------------------------------------------------------------
Source: TMS/Gracenote; Cable Data Corporation; Kantar media/SRDS.
Note: Robust standard errors in parentheses.
*** pwww.dictionary.com,
last visited 07/19/2018.
---------------------------------------------------------------------------
More than one witness downplayed Professor Steckel's complexity
criticism, asserting that the survey respondents are experienced
professionals thoroughly familiar with the programming categories
copyright owners utilize in CRB distribution proceedings. See, e.g., 3/
13/18 Tr. at 3176 (Hartman) (CSOs negotiate for linear channels, but
channels fall into categories. ``It's our day-to-day job to . . . know
those, that type of programming.''); 2/22/18 Tr. at 1144-45 (Singer).
Participants proffering survey results as a measure of relative value
also asserted that cable system executives could accurately allocate
program category values by reference to the ``dominant impression'' of
each signal's content or the ``signature programming'' of a given
signal. See 2/15/18 Tr. at 281, 334 (Trautman); 2/22/18 Tr. at 1001
(Singer).
Ms. Sue Ann Hamilton testified that the programming categories
adopted in royalty distribution proceedings are unique and ``quite
different from the industry understanding of what programming typically
falls in a particular programing genre.'' Id. at 10; see 3/19/18 Tr. at
4309, 4312 (Hamilton); Hamilton WRT at 17-18. For example, she
testified that ``most cable operators'' would not recognize that pre-
and post-game interviews and highlight compilation telecasts would fall
into the Program Suppliers category, or that locally produced high
school team sports would fall into the Commercial Television category.
Id. at 11. Other industry witnesses disagreed. See 2/22/18 Tr. at 1046-
47 (Singer) (categories ``straightforward''). Ms. Hamilton further
opined that cable operators were not likely to differentiate between
network and non-network sports telecasts and that migration of live
team sports programming to regional cable networks further complicates
the equation. See Hamilton WRT at 17-18; 3/19/18 Tr. at 4315
(Hamilton).
Dr. Stec gave weight to Ms. Hamilton's testimony. See Stec AWRT at
23-25. According to Dr. Stec, the Horowitz Survey results, gained after
the surveyors provided category descriptions and program examples,
demonstrate the fallacies of the Bortz Survey and its reliance on CSO
executives' familiarity with the program categories. Id. at 27. The
Horowitz category descriptions and examples were also roundly
criticized, however.\132\ Nothing in Dr. Stec's analysis supports his
contention that there is a causal relationship between changes in an
interviewer's category or program descriptions in the two major
surveys, from which Dr. Stec concludes that the Horowitz results are
more valid than the Bortz results.
---------------------------------------------------------------------------
\132\ See discussion at section Sec. III.D.2.b.
---------------------------------------------------------------------------
A related criticism from Professor Conrad was that the categories
about which respondents were questioned were not comparable. Id. at 10-
11. In other words, all programming categories other than CCG and PTV
are characterized by homogeneity in types of program content. The CCG
and PTV categories, on the other hand, are based on program origin and
include programs that span the categories making them, in this context,
``unnatural categories.'' See 3/5/18 Tr. at 1965 (Conrad). Even though
cable systems might retransmit PTV signals, all of which are
compensable entirely from the PTV category, PTV stations might
broadcast children's programming, nationally produced specials or
series, or locally-produced programming. On the other hand, some of the
CCG programs might be allocable to another category but some might
not.\133\
---------------------------------------------------------------------------
\133\ For example, Mr. Trautman acknowledged that the Bortz
Survey did not differentiate by category programming transmitted on
Canadian signals even though some of the programs should be
compensated not in the CCG group, but in other categories. 2/20/18
Tr. at 629 (Trautman).
---------------------------------------------------------------------------
b. Augmentation of Categories
Professor Mathiowetz criticized aspects that distinguish the
Horowitz Survey from the Bortz Survey. Her two most significant
criticisms related to Mr. Horowitz's use of program examples and the
creation of an ``Other Sports'' category.\134\
---------------------------------------------------------------------------
\134\ Professor Mathiowetz also opined that the Horowitz Survey
was not a valid constant sum survey because some of the Horowitz
respondents, the PTV-only and CCG-only systems, could be asked about
only one category of programming, and thus not requiring a sum of
percentages at all. 2/20/18 Tr. at 511 (Mathiowetz). While correct
as to PTV-only systems, this opinion disregards the fact that
Canadian stations transmit both CCG-compensable programs and, for
example, Devotional programs compensable from the SDC royalty funds.
---------------------------------------------------------------------------
Professor Mathiowetz asserted that a questioner's volunteering of
examples tends to bias survey results. See 2/20/18 Tr. at 699
(Mathiowetz); but see 3/5/18 Tr. at 1967-68 (Conrad) (examples can hurt
or help or have no effect on responses). According to Professor
Mathiowetz, Respondents assume a questioner has valid information or
knows something that is important to the survey outcome. See 2/20/18
Tr. at 699 (Mathiowetz). Thus, even a knowledgeable respondent might be
influenced by a questioner's prompting. As she noted, in a relative
valuation, a shift in one category affects potentially the value of
every other category. Id. at 727.
Furthermore, according to Professor Mathiowetz, some of the
examples used in the Horowitz Survey were simply erroneous. 2/20/18 Tr.
700 (Mathiowetz). Use of erroneous examples illustrated Professor
Mathiowetz's criticism of Mr. Horowitz's creation of an ``Other
Sports'' category. In an effort to differentiate live team college and
professional sports, i.e., the programs to be compensated from JSC's
share of the royalty funds, interviewers introduced ``other sports
programming.'' For WGNA-only systems, the category description ended
with ``Examples include horse racing.'' Id. at 27. According to
Professor Mathiowetz, in 2013, WGNA carried only a single horse race.
Accord Trautman WRT 20-21.\135\ For WGNA and PTV systems, the
interviewers prompted, ``Examples include NASCAR auto races,
professional wrestling, and figure skating broadcasts.'' Horowitz WDT
(App. A) at 26. WGNA retransmitted no programming fitting the
description of the examples. 2/20/18 Tr. at 703 (Mathiowetz). Professor
Mathiowetz also expressed doubt that non-JSC sports broadcasts
accounted for sufficient distantly retransmitted airtime to warrant a
separate category, even for survey inquiry purposes. Id. at 702. As she
noted in another context, in a constant sum survey, variation in one
[[Page 3589]]
category necessarily effects the relative value of other categories.
See 2/20/18 Tr. at 727 (Mathiowetz).
---------------------------------------------------------------------------
\135\ Mr. Trautman further argued that cable systems retransmit
a ``substantial amount'' of other sports programming, most of which
is non-compensable under the section 111 license. Trautman WRT at
16. He contended that, notwithstanding the examples of rare
compensable sports broadcasts, CSO respondents likely confused the
volume of non-compensable sports programs as belonging in the
unfamiliar Other Sports category inserted by Mr. Horowitz. Id.
---------------------------------------------------------------------------
Professor Conrad agreed with the criticism of enumerating examples
of ``other sports'' or any program category. 3/5/18 Tr. at
1967(Conrad). According to Professor Conrad, citing examples might cut
either way. If the example is typical of the category, then citing it
will have no effect. An atypical example might help a respondent
``think outside the box'' and trigger a broader, more accurate
response. For other respondents, however, an atypical example might
narrow focus to incidents closely related to the particular example and
therefore confine the respondent's thinking too narrowly. Id. at 1968.
Professor Conrad cautioned that a ``rare example'' will bias downward
the counts for more typical choices. Id.
Mr. Horowitz assigned all ``Other Sports'' points to Program
Suppliers. See Horowitz WDT at 3, 5. This allocation ignores the
possibility that a portion of ``other sports'' might be attributable to
CTV. Without evidence to support the assignment of all ``other sports''
value to Program Suppliers, the category becomes even more problematic.
c. Value Measurement
Dr. Jeffery Stec, criticized the Bortz Survey on several grounds.
See Stec AWRT at 11-12. His primary criticism is that the Bortz Survey
measures, at best, only a CSO's willingness to pay. Id. at 17. Dr. Stec
disputes the assertion by Mr. Trautman and Bortz that CSO respondents
are familiar with the rates charged for programming and that their
responses are, therefore, a reflection of the ``supply side.'' Id. at
18; see 3/13/18 Tr. at 3432-50 (Stec). Dr. Stec contends that a CSO's
willingness to pay is also influenced by its own market factors, e.g.,
local market demand or competition from other CSOs. Id. at 19-20.
According to Dr. Stec, relative willingness to pay is not the same as
relative market value. Id. at 22.
An underlying assumption in each survey is that cost is the
equivalent of value. Economists do not measure such a subjective trait
as value. According to Professor Steckel, value, in an economic sense,
can only be surmised by reference to external indicators of value.
Steckel WDT at 36-40; but see Mathiowetz WRT ]] 4, 11-12 (Steckel
incorrect; CARP precedent accepted Bortz as measure of relative market
value). Professor Steckel opined that resource allocation does not
equate to value and that marketplace value is measured by a CSO's
return on investment. Steckel WDT at 21. Because of the cable
television market structure, i.e., program acquisition in a bundle,
CSOs are unable to assess market returns by program category. Id.
Professor Steckel proposed--as a possible alternative to surveying CSO
executives' best guesses about supply-side relative values--a survey of
demand-side program consumers. Steckel WDT at 40-41 (``customers are
the best judges of what customers want, value, and will do.'').
Alternatively, Professor Steckel recommended relying on viewership to
establish relative values. See Steckel WRT at 4.
Mr. Horowitz also criticized Bortz for asking a cost question,
opining that cost is not the equivalent of value. Horowitz WDT at 7. He
testified that the Bortz Survey erroneously mixed the concepts of value
and cost. 3/16/18 Tr. at 4146-47 (Horowitz). Mr. Horowitz contended
that by asking about expense in a warmup question, Bortz conflated the
concepts of cost and value.\136\ Mr. Horowitz noted that the Bortz
Survey did not define ``relative value'' and made no mention of
subscriber attraction and retention.\137\ Id. Further, Mr. Horowitz
criticized the form of the budget allocation (constant sum) question as
ambiguous. The question asked how much the respondent's system ``would
have spent'' during the relevant year. See, e.g., Bortz Survey at B-5
(Question 4a.). Mr. Horowitz maintains this sentence structure is open
to interpretation. Id. Treatment of PTV, CCG, and WGNA.
---------------------------------------------------------------------------
\136\ Question 3 of the Bortz Survey asked respondents as a
warmup question to rank how ``expensive'' it would be to acquire the
programming in each category if the system had to acquire the
programming ``in the marketplace.'' See, e.g., Bortz Survey at B-4.
\137\ See supra note 110 and accompanying text.
---------------------------------------------------------------------------
d. PTV and Canadian Measures
Various parties criticized the treatment of PTV and CCG claimant
groups in almost every relative value measure, including the surveys.
As noted, Ms. McLaughlin and Dr. Blackburn criticized both the survey
and regression methodologies, but applied their ``changed
circumstances'' \138\ analysis to estimate the relative value of PTV
programming and PTV's relative claim to royalties deposited in the
Basic Fund.\139\ Professor Conrad opined that it was a ``strange
practice'' to assign a value of zero to Canadian programming for
respondents who did not retransmit any Canadian signals. See 3/5/18 Tr.
at 1964-65 (Conrad). He testified that the better practice would have
been to characterize Canadian programming for non-CCG signals as
``missing data'' and to impute values from data actually collected. Id.
at 1965.
---------------------------------------------------------------------------
\138\ See infra section 200E;VI. McLaughlin and Blackburn used
the Judges' 2004-05 distribution determination as their starting
point. See Testimony of Linda McLaughlin & David Blackburn, Trial
Ex. 3012 at 9 (McLaughlin/Blackburn WDT).
\139\ PTV does not participate in the 3.75% Fund or the Syndex
Fund. McLaughlin and Blackburn were careful, therefore, to relate
their valuations to the Basic Fund. See McLaughlin/Blackburn WDT,
passim.
---------------------------------------------------------------------------
Mr. Trautman acknowledged a slight participation bias in the Bortz
Survey, but testified that the number of PTV-only and CCG-only cable
systems (approximately 60 systems in the aggregate) was insignificant
and that including them would have made little difference in his
results. See 2/15/18 Tr. at 507 (Trautman). The triers of fact for
these royalty allocation proceedings have long recognized that the
results of the survey methodology employed by Bortz exhibited a bias
against PTV and Canadian claimants. The Judges in the 2004-04
proceeding acknowledged that the participation bias affecting results
for both PTV and CCG was troubling, but that
[i]t would be inappropriate to overstate the impact of this problem.
No one in this proceeding maintains that it substantially affects
more than a small portion of the total royalty pool . . . . Nor has
it been shown that the Bortz survey's remaining non-PTV-Canadian
estimates were thrown outside the parameters of their respective
confidence intervals solely because of this problem. That is, the
PTV-Canadian problem does not substantially affect any of the
remaining categories in some disproportionate way.
2004-05 Distribution Order, 75 FR at 57067. Nonetheless, on rebuttal,
Mr. Trautman adjusted the Bortz Survey results based on the McLaughlin/
Blackburn testimony that supported a greater valuation of the PTV and
CCG claimant groups and by referring to the Horowitz Survey responses
to further adjust the augmentation proposed by McLaughlin/Blackburn.
See Trautman WRT at 47-48; 2/20/18 Tr. at 523-24 (Trautman).\140\
---------------------------------------------------------------------------
\140\ Mr. Trautman made the further adjustment by reference to
the Horowitz Survey actual responses from PTV-only cable systems.
See 2/2/0/18 Tr. at 525-26 (Trautman).
---------------------------------------------------------------------------
Further, in the present proceeding, the Judges have the advantage
of competing surveys such as the Ringold Survey commissioned by the CCG
that dealt with PTV and Canadian programming, and other methodologies
that did not suffer from the participation bias that discounts the
Bortz Survey results.
[[Page 3590]]
e. Impact of WGNA
Participants in the present proceeding wrangled with valuation of
WGN programming distantly retransmitted on the WGN ``Superstation,''
WGN America (WGNA).\141\ WGNA did not offer for retransmission, a
program lineup identical to the one broadcast locally on WGN. Only
those programs carried simultaneously on WGN and WGNA are compensable
under the section 111 license. WGNA substituted syndicated or
devotional programming for elements of the WGN signal. In the 2004-05
proceeding, the Judges criticized the Bortz Survey for failing to
measure and value accurately the compensable programs retransmitted on
WGNA. In fact, Bortz acknowledged this failure to differentiate
compensable from noncompensable programs on WGNA and conceded that the
survey results for Program Suppliers (the category most frequently
retransmitted on WGNA) and Devotional Programming should be considered
the ceiling for those categories. See 75 FR at 57067. In the 2004-05
determination, the Judges cited repeatedly the lack of record evidence
regarding the quantitative adjustment for over-valuing noncompensable
programming retransmitted on WGNA. See, e.g., id.
---------------------------------------------------------------------------
\141\ According to the Bortz Survey, approximately three-fourths
of cable systems retransmitting distant signals retransmitted WGNA.
Bortz Survey at 25.
---------------------------------------------------------------------------
In the present proceeding, Bortz employed a separate questionnaire
form to survey cable systems that retransmitted only the WGNA signal.
Bortz created a WGNA programming list that identified compensable
programming and provided the list to survey respondents before
continuing with the questions. See Bortz Survey at 30. Bortz continued
to use its standard questionnaire for cable systems that carried WGNA
along with other distant signals. See Bortz Survey at B-2 (``This
Appendix provides examples of the survey instruments used to interview
respondents at systems that carried distant signals in addition to or
other than WGN during the relevant survey year.'') (emphasis added).
The Horowitz Survey's questions relating to WGNA directed
respondents not to assign any value to noncompensable programming,
describing noncompensable programs as ``substituted for WGN's blacked
out programming.'' Mr. Trautman opined that the ``blacked out''
instruction in the Horowitz Survey was meaningless because respondents
would ``have no reason to be aware of which [programming is
substituted].'' See 2/20/18 Tr. at 535 (Horowitz).
WGNA was the most widely-retransmitted station in the U.S. during
the period at issue in this proceeding.\142\ In the 2010-2013 timeframe
WGNA was retransmitted by approximately three-fourths of the cable
systems retransmitting distant signals and reached over 41 million
distant subscribers. See Wecker Report, ] 23; Bortz Survey at 25. Bortz
attempted to improve on the measure of WGNA retransmissions criticized
in the 2004-05 proceeding. Horowitz also addressed the issue from the
2004-05 Bortz survey, but with less specificity than Bortz achieved in
its 2010-13 survey for WGNA-only cable systems.
---------------------------------------------------------------------------
\142\ For purposes of the royalty years at issue in this
proceeding, WGNA as a superstation cast a long shadow on valuation
methodologies. Following the period at issue in the present
proceeding, WGNA began the process of converting to a cable network,
which would, in time, remove it from consideration in royalty
allocation proceedings.
---------------------------------------------------------------------------
E. Conclusions Regarding Surveys
Surveys of cable system programming executives provide insight into
the value those executives assign to the categories of programs
eligible to receive a portion of the retransmission royalties cable
systems deposit with the Copyright Office. No participant in any
television royalty proceeding has developed a method to measure the
actual market value of a content creator's product as bundled into a
broadcast signal. Indeed, the value of a content creator's product will
vary depending on the nature of the bundle and the buyer of that
bundle; every creator and every viewer is likely to place a different
value on every product. As buyers of the broadcast signals, CSO
executives' valuations reflect their conclusions regarding the extent
to which the category of programming contributes to the return on that
investment; i.e., helps the cable system attract and retain
subscribers.\143\
---------------------------------------------------------------------------
\143\ Subscribers are a major source of revenue for cable
systems; consequently, CSOs focus on retention of subscribers. In
some instances, a CSO might relicense a signal with less viewed,
niche programming to avoid losing a subscriber to a competing
system. See 3/19/18 Tr. at 4297-99 (Hamilton).
---------------------------------------------------------------------------
Surveys of CSO executives admittedly measure only the demand side
of a value calculation. Several witnesses in the present proceeding
criticized the focus only on a demand-side valuation. See, e.g., 3/13/
18 Tr. at 3433 (Stec) As noted in the discussion of relative value in
allocation proceedings, the Judges accept that there are valid reasons
for focusing on the demand side in this proceeding. See 1998-99
Librarian Order, 69 FR at 3615 (in relevant hypothetical marketplace,
supply of broadcast programming is fixed and does not determine value).
Indeed, in the present proceeding, both the regression and viewership
methodologies also attempt to measure value from a demand-side
perspective: Regressions by measuring various demand variables, such as
subscribers, and the viewership study by measuring consumption of
programming by viewers. In the current regulated market structure,
CSOs' purchase of broadcast signals as bundles reflects a derived
demand, one step removed from the supply and demand measured at the
station acquisition level. CSOs deposit royalties based on distant
signal equivalents (or a minimum fee) that is divorced from the
individual program content copyright owner. In this context, the
buyers' demand, as measured primarily by revealed preferences, is the
only equitable measure of compensation to copyright owners.
Bortz, Horowitz, and Ringold used a constant sum construct, asking
respondents to value program categories by percentages and requiring
that their allocations totaled 100%. The Bortz Survey muddled the
concepts of cost and value by means of its warm-up question that asked
survey respondents to rank program categories by how expensive it would
have been for the CSO to acquire them. This may have injected some
confusion into the respondent's estimation of relative value. The
question of interest in this proceeding is not cost; rather, it is
relative value. It is unclear how, if at all, the injection of a cost
question furthers that inquiry.
Further, as in past surveys Bortz did not survey cable systems that
carried only PTV and/or CCG signals; those systems thus had no
opportunity to allocate any of their hypothetical budgets to PTV or CCG
programming. See id. The Horowitz Survey included PTV- and CCG-only
systems, but threw a curve ball by including an ``Other Sports''
category when there may have been little to no ``other sports''
content, and assigning the entire value of that category to Program
Suppliers. Horowitz also may have introduced bias by providing program
examples for some of the program categories. The examples, at best,
would have had no effect on the results; but at worst, could have
skewed results unnecessarily.
For all of the reasons highlighted by critics of the survey
valuation method, the Judges agree that surveys are not a perfect
measure. Nonetheless, survey results have been cited in prior royalty
distribution proceedings as a generally acceptable starting point to
measure
[[Page 3591]]
relative program category value. Previous allocation determinations
have relied heavily and almost exclusively on Bortz surveys. That
reliance serves as precedent for the current Judges.\144\ Adoption of a
methodological precedent does not, however, preclude the Judges'
consideration of current evidence.\145\ In the present proceeding, the
Judges have three CSO surveys to consider. The methodological precedent
thus gives rise to additional evidence to guide the Judges' treatment
of the survey methodology. Notwithstanding the differences in approach,
the results derived from the Bortz Survey and the Horowitz Survey are
compatible. Further, the relative valuations of CSO executives do not
vary wildly from the valuations derived from participants' regression
analyses.
---------------------------------------------------------------------------
\144\ In the 1998-99 CARP determination, the Panel concluded
that the Bortz Survey was the most ``robust'' and ``powerfully and
reliably predictive'' model for determining relative value . . .''
for all categories except PTV, Canadian Programming, and Music
Claimants. Report of the Copyright Arbitration Royalty Panel to the
Librarian of Congress, Docket No. 2001-8 CARP CD 98-99, at 31 (Oct.
21, 2003) (1998-99 CARP Report); see also 1998-99 Librarian Order,
69 FR at 3609. For PTV, the Panel acknowledged the inherent bias
against PTV in the Bortz Survey, but found the changed circumstances
and fee-generation evidence proffered by PTV to be unpersuasive and
declined to increase the PTV allocation percentage from the 1990-92
determination. Id. at 3616.
\145\ For Canadian Claimants, the CARP had no Bortz results so
it used a fee-generation methodology. Id. at 3618. In the 2000-03
determination involving only the Canadian Claimants, the Judges
distinguished the precedential mandate of a fee-generation
methodology and applicable changed circumstances evidence. See 2000-
03 Distribution Order, 75 FR at 26807.
---------------------------------------------------------------------------
The Judges conclude that the allocation measures resulting from the
Horowitz Survey, with adjustments, are the survey results that most
closely reflect the relative value of the agreed categories of
programming in the hypothetical, unregulated market. Regardless of
proffered evidence to the contrary, the Judges find that the surveyed
cable system executives were sufficiently familiar with the compensable
content on the signals their respective systems retransmit.\146\
---------------------------------------------------------------------------
\146\ Further, the categories endorsed by the Judges in the
present proceeding have not changed for decades, giving CSOs time to
acquaint themselves fully with the programming comprising each
agreed category, whether or not they routinely agree with the
programming characterizations at issue in these proceedings. The
Judges do not gainsay that there have been changes in CSO personnel
over the years, but it is nonetheless not unreasonable to think that
even with changes in personnel, the CSOs have maintained an
institutional memory of the requirements of these proceedings.
---------------------------------------------------------------------------
The doubly regulated nature of compensable Canadian programming
complicates assignment of a value to that category. The clarity of the
Ringold Survey, with its comparisons to superstations and independent
stations, establishes the relative value of Canadian and non-Canadian
programming on Canadian signals to cable systems retransmitting within
the Canadian zone of the U.S. The Ringold Survey takes the relative
values of Canadian programming on Canadian signals to cable operators
that retransmit them within the Canadian zone. The CCG did not provide
any means of converting those results into a royalty share for the CCG
category (or any other program category). The Ringold survey is thus of
minimal assistance to the Judges.
Horowitz did not exclude from its sample systems that distantly
carried only PTV and/or Canadian signals. The Judges conclude that
Horowitz's use of examples to ``aid'' respondents, while flawed, was
not likely to skew significantly results in any of the established
categories. Horowitz. Horowitz's inclusion of Other Sports created a
value where none, or next to none, existed and allocated all Other
Sports value to Program Suppliers.
For all the reasons described above, particularly the acknowledged
systematic bias against PTV and CCG programming, the Judges accord
relatively less weight to the ``Augmented'' Bortz Survey. On balance,
the Judges find the Horowitz Survey results to be more reflective of
CSOs actual valuations of the program categories defined by agreement
and adopted in this proceeding. However, the Judges cannot accept
allocation of 100% of the Other Sports relative value to Program
Suppliers. For that reason, the Judges conclude that the most
appropriate treatment of the Other Sports ``points'' is to reallocate
them in proportion to the relative values established outside the Other
Sports category. The Judges' calculations are illustrated in Table
15.\147\
---------------------------------------------------------------------------
\147\ For example, for 2010, eliminating the relative value of
Other Sports from the 100% constant sum leaves an allocation of
93.23% of the total assessed value. Recasting that 93.23% as the
whole, the 3.78% relative value assigned to Devotional programming
in 2010 would translate to 3.52% (3.78% of 3.78 x 93.23 = 100x; x =
3.52).
Table 15--Horowitz Survey Results After Reallocating ``Other Sports'' to Remaining Categories
----------------------------------------------------------------------------------------------------------------
2010 (%) 2011 (%) 2012 (%) 2013 (%)
----------------------------------------------------------------------------------------------------------------
CTV............................................. 13.28 14.41 17.28 10.30
Program Suppliers............................... 40.15 32.50 30.90 30.94
JSC............................................. 34.26 30.41 28.03 38.10
SDC............................................. 4.05 6.64 6.31 3.76
PTV............................................. 8.25 14.92 16.54 16.62
CCG............................................. 0.01 1.12 0.96 0.38
----------------------------------------------------------------------------------------------------------------
With regard to the ultimate question of interest in the present
proceeding, the Judges conclude that survey results offer one
acceptable measure of relative value, particularly for Sports, Program
Suppliers, Commercial TV, and Devotional programming. With regard to
PTV and Canadian programming, adjustments resulting from the
McLaughlin/Blackburn evidence and the Ringold Survey assure a
reasonable relative value of PTV and Canadian signals, respectively.
Considering all of the evidence presented in this proceeding, the
Judges conclude that the constant sum survey methodology, with
adjustments, provides relevant information relating to the relative
value for each of the six categories remaining at issue. Considering
the more persuasive regression analyses, however, the Judges afford
less evidentiary power to the values derived from these adjusted survey
results. The Judges conclude that Dr. Crawford's first (duplicate
minutes) regression analysis is a stronger base on which to make the
category allocation determination.
IV. Viewership Measurement
Program Suppliers, unique among all participants in this
proceeding, proposed an allocation methodology based on the relative
amount of aggregate viewing of the programs in each of the agreed
program categories.
[[Page 3592]]
They presented this methodology through the report and testimony of
economist Dr. Jeffrey Gray.\148\
---------------------------------------------------------------------------
\148\ Dr. Gray also performed an analysis of the relative
``volume'' (i.e., total number of minutes) of the different
categories of programming, which he described as ``useful'' but not
``sufficient'' information concerning the relative value of
programming. See Corrected Amended Direct Testimony of Jeffrey S.
Gray, Ph.D., Trial Ex. 6036, ]] 17-18, 32-34 (Gray CAWDT); 3/14/18
Tr. at 3696-97 (Gray); 3/15/18 Tr. at 3834-36 (Gray). As Dr. Gray
himself conceded that his volume analysis was an insufficient basis
for determining relative value of programming, the Judges will not
rely on it. See also Written Rebuttal Testimony of Dr. Mark A.
Israel, Trial Ex. 1087, ] 38 (Israel WRT) (``measures of volume do
not translate directly into value''). The Judges need not consider,
therefore, criticisms concerning the accuracy of Dr. Gray's volume
analysis. See Analysis of Written Direct Testimony of Jeffrey S.
Gray, Ph.D., Trial Ex. 1089, at ]] 11-17 (Wecker Report); 2/22/18
Tr. at 1169 (Harvey); Written Rebuttal Testimony of Christopher J.
Bennett, Trial Ex. 2007, ]] 36-43 (Bennett WRT); 3/1/18 Tr. at 1861-
64 (Bennett).
---------------------------------------------------------------------------
A. Viewership as a Measure of Value
Dr. Gray posited a hypothetical market structure divided into a
primary market and a secondary market. In the primary market
broadcasters would purchase from copyright owners the right to
broadcast programs in their local market (as is currently the case) and
would at the same time obtain the right to retransmit the programs into
distant markets. In the secondary market the broadcasters would sell
their entire signal to cable operators, most likely as part of
retransmission consent negotiations. In the hypothetical primary market
the broadcaster would pay the copyright owner both a royalty to
broadcast the program in the local market and a surcharge for the right
to retransmit each program into distant markets. The broadcaster would
recoup that surcharge as part of its transaction with the cable
operator in the secondary market. See 3/14/18 Tr. at 3682-84, 3779-81
(Gray); Hamilton WDT at 14.
Dr. Gray stated that ``[i]t is axiomatic that consumers subscribe
to a CSO to watch the programming made available via their
subscriptions'' and that ``[t]he more programming a subscriber watches,
the happier the subscriber is, and the more likely she will continue to
subscribe, all else equal.'' Gray CAWDT ] 13. He concluded, therefore,
that ``a measure of the happiness, or `utility,' an individual
subscriber gets from a specific program is the number of minutes that
subscriber spent viewing the program offered to him or her by the CSO''
and ``[a] measure of the utility all subscribers get, in total, from a
specific program is the total level of subscriber viewing of the
program.'' Id.
Applying this economic principle to the hypothetical market, Dr.
Gray opined that expected viewing in the distant market would determine
the value of the programming in the distant market. See 3/14/18 Tr. at
3684-85, 3873-74. Program Suppliers assert that actual and projected
subscriber viewing information would be critical to negotiations
between cable operators and broadcasters for the right to retransmit
broadcast signals in an unregulated market. See PS PFF ] 17; Hamilton
WDT at 14; 3/19/18 Tr. at 4317-19 (Hamilton). Consequently, Program
Suppliers argue that subscriber viewing information is the most
reasonable metric for determining relative market value. See PS PFF ]
18; Hamilton WDT at 14-15; 3/19/18 Tr. at 4317-19 (Hamilton); 3/14/18
Tr. at 3822-23, 3873-74 (Gray).
B. Implementation of the Viewing Study
In the broadest sense, Dr. Gray's methodology for determining the
relative value of programming in the various program categories was to
assign all compensable distantly retransmitted programs on a sample of
stations to appropriate program categories, aggregate the quarter hours
of expected viewing for every program in each category, and divide the
total number of expected quarter hours of viewing for each program
category by the sum of expected quarter hours of viewing for all
categories. See Gray CAWDT ] 22; 3/14/18 Tr. at 3684-85, 3689-90
(Gray).
To accomplish this, Program Suppliers obtained, at Dr. Gray's
direction, data on cable systems and retransmitted television signals
from Cable Data Corporation (CDC),\149\ television programming data
from Gracenote,\150\ program logs for Canadian television stations from
the Canadian Radio-television and Telecommunications Commission
(CRTC),\151\ and viewing data from Nielsen's National People Meter
(NPM) database.\152\ See 3/14/18 Tr. at 3685-88 (Gray). Due to cost
considerations, Dr. Gray created a sample of approximately 150
distantly retransmitted stations for each year and instructed Program
Suppliers to obtain program and viewership data only for those stations
included in his sample. See Gray CAWDT at 24 App. B; 3/14/18 Tr. at
33686-89 (Gray).
---------------------------------------------------------------------------
\149\ CDC data is a compilation of information provided by cable
systems to the Copyright Office on their semi-annual statements of
account (SOAs). It includes information about the number of distant
signals that each cable system carries, the number of subscribers
receiving each distant signal, and the amount of royalties paid. See
Gray CAWDT ] 28; Martin WDT at 5. From this information, CDC
provided, inter alia, an analysis of which counties fall within a
television station's local service area. See Martin WDT at 5-6.
\150\ Gracenote (formerly Tribune) provides a compilation of
information about each television program airing throughout each
day, including the station on which the program aired; whether the
program was local, network or syndicated; the program and episode
titles; and the type of program. See Gray CAWDT ] 27; 3/14/18 Tr. at
33686-87 (Gray).
\151\ The CRTC program logs include station call signs, program
title, actual starting and ending time, and country of origin for
each program broadcast on Canadian television stations. Dr. Gray
used them to determine the country of origin of programs broadcast
on Canadian stations, since U.S.-origin programs are excluded from
the Canadian Claimant category. See Gray CAWDT ] 29.
\152\ A ``people meter'' is a device attached to a television
set that passively detects the channel to which the television is
tuned, and includes a means for each household member to identify
him- or herself as the person watching the TV. The NPM database is
derived from a national sample of households equipped with people
meters and is used for measuring national broadcast and cable
networks. See Direct Testimony of Paul B. Lindstrom, Trial Ex. 6017,
at 4 (Lindstrom WDT); 3/14/18 Tr. at 3496-97, 3505-07 (Lindstrom).
---------------------------------------------------------------------------
Dr. Gray did not calculate viewing shares directly from the Nielsen
viewing data. Instead, he used the Nielsen data as inputs to a
regression algorithm that permitted him to calculate expected distant
viewing for each program in each quarter-hour throughout each year
based on a number of independent variables including what Dr. Gray
described as ``a measure of local ratings.'' See Gray CAWDT ]] 36-38;
3/14/18 Tr. at 3692 (Gray).\153\ Dr. Gray stated that he employed
regression to compensate for the high incidence of non-recorded viewing
in the Nielsen data, as well as instances where viewing data were
missing. Id. at 3690-91. Regression analysis allowed Dr. Gray to
estimate positive viewing even in instances where there was zero
observed viewing in the Nielsen data, by increasing low estimates and
decreasing high estimates. Dr. Gray described this as ``data
smoothing,'' and opined that ``[i]t's a desirable outcome in general
when estimating based upon other estimates, in particular.'' Id. at
3691. In addition, regression allowed Dr. Gray to ``fill in the
blanks'' where Nielsen data was missing. Id.
---------------------------------------------------------------------------
\153\ The other independent variables include the time of day
that the program aired and the program type. See 3/14/18 Tr. at 3692
(Gray).
---------------------------------------------------------------------------
Based on his regression analysis Dr. Gray derived the following
viewing shares:
[[Page 3593]]
Table 16--Gray Viewing Shares
----------------------------------------------------------------------------------------------------------------
Royalty share
Claimant ---------------------------------------------------------------
2010 (%) 2011 (%) 2012 (%) 2013 (%)
----------------------------------------------------------------------------------------------------------------
Canadian Claimants.............................. 1.96 3.93 3.58 5.16
Commercial Television........................... 15.83 12.06 15.48 10.61
Devotionals..................................... 1.18 2.44 1.07 1.10
Program Suppliers............................... 50.94 49.92 36.17 45.09
Public Television............................... 27.96 29.09 41.64 33.29
JSC............................................. 2.13 2.57 2.06 4.76
---------------------------------------------------------------
Total....................................... 100 100 100 100
----------------------------------------------------------------------------------------------------------------
Gray CAWDT ] 38, Table 2.
Program suppliers propose that Dr. Gray's viewing shares serve as
one end of a range of reasonable royalty allocations (the other end
being determined by the Horowitz survey). PS PFF ] 355.
C. Criticism of Dr. Gray's Viewing Study
Program suppliers' proposed use of Dr. Gray's viewing analysis as a
basis for allocating royalty shares was roundly criticized by nearly
all other participants through their respective experts. The criticism
ranged from general disagreement with the underlying premise that
viewership is an appropriate measure of relative value, to specific
critiques of how Dr. Gray executed his study.
1. Viewership Not an Appropriate Measure
Several economists testified that viewership is not an appropriate
measure of relative value, at least when apportioning value among
different program types.\154\ See, e.g., Written Direct Testimony of
Michelle Connolly, Trial Ex. 1005, ] 33, and citations to designated
prior testimony therein (Connolly WDT); Israel WRT ] 42; see also 3/7/
18 Tr. at 2474 (McLaughlin) (``We can look at viewing, which I don't
see as a measure of value itself . . . .''). For example, Dr. Mark
Israel, an economist testifying for the JSC, opined that Dr. Gray's
viewing analysis ``provides no reliable basis for determining the
relative valuation'' of the agreed categories of programs, primarily
because ``it treats all viewing minutes as the same and thus does not
account for the fact that minutes of different types of programming
have different values.'' Israel WRT ] 42. Dr. Israel argues that it is
not valid to treat all minutes of viewing equally without considering
the number of minutes of each type of content that is available. ``If
the same number of minutes of all types of content were available, then
the total amount of each that viewers choose to consume could indicate
their relative value. But given the smaller number of available minutes
of Sports programming, one cannot support such a conclusion.'' Id.
---------------------------------------------------------------------------
\154\ Dr. Erdem, an economist testifying on behalf of the SDC,
conceded that, in past proceedings, he had found viewership to be a
reasonable basis for apportioning royalties among claimants within
the same program category. See 3/8/18 Tr. at 2791-93 (Erdem); accord
Amended Written Direct Testimony of John S. Sanders, Trial Ex. 5001,
at 22.
---------------------------------------------------------------------------
Professor Crawford, an expert witness for CTV, sought to
demonstrate the lack of a one-to-one correlation between viewing
minutes and relative value by examining the affiliate fees cable
operators pay in an unregulated market to carry cable channels with
different types of content. His analysis showed that cable systems pay
far more for sports content than non-sports content with the same level
of viewership. See Written Rebuttal Testimony of Gregory S. Crawford,
Ph.D., Trial Ex. 2005, ] 36 & Fig. 1 (Crawford WRT).
Dr. Israel posited that many viewers may choose to view a given
category of programming only as a second choice because their first
choice is not available. See Israel WRT ] 42. Stated differently, a raw
viewing measurement conveys no information about the intensity of the
viewers' preferences for particular types of programming. See Connolly
WDT ] 29. In its pursuit of greater subscription revenues, ``the
perceived intensity of subscriber preferences'' would be a key
consideration for cable operators. Id. ]] 29-30.
Several economists found Dr. Gray's focus on subscribers' viewing
patterns to be misplaced because it is cable operators, not
subscribers, who pay for programming to fill their channel lineups.
See, e.g., Israel WRT ] 43; Written Rebuttal Testimony of Matthew Shum,
Trial Ex. 4004, ] 7 (Shum WRT). ``Naturally, the value of distant
signals to CSOs derive [sic] in part from the value that existing and
potential subscribers place on them. . . . Nevertheless, as a
principle, the relative market values for distant signal programming
depend on the CSOs' valuations of the programming, and not on
subscribers' valuations. Shum WRT ] 7. According to CCG expert
Professor Shum, viewing is, at best, ``a measure of subscribers'
valuations'' rather than CSOs'. Id. ] 8.
Dr. Gray's critics assert that viewership is not a primary
consideration for cable operators. A cable operator's goal in selecting
distant signals is to grow subscriber revenue by attracting new
subscribers, retaining existing subscribers, and increasing
subscription fees. See Connolly WDT ]] 29, 31-32. Cable operators seek
to increase profits by offering bundles of channels that will appeal to
subscribers with varying tastes, including tastes for niche
programming. See Shum WRT ]] 10-11; Connolly WDT ]] 31-32. According to
JSC expert Professor Connolly, ``the economics of bundling suggests
that the most profitable addition to a cable system's programming is
for content that is negatively correlated with content already offered
by the cable system[,]'' thus, ``in the context of the economic value
of individual programming within a bundle to a CSO, neither simple
viewership data nor volume of programming is an appropriate metric for
the relative market value of programming on distant signals.'' Connolly
WDT ]] 32, 31; accord Crawford CWDT ] 7 (``channels that appeal to
niche tastes are more likely to increase cable operator profitability
due to the likelihood that household tastes for such programming are
negatively correlated with tastes for other components of cable
bundles''). As Professor Shum explained:
[N]iche programming, which may have small viewership numbers, may
actually have higher incremental value for CSOs relative to mass
appeal programs with larger viewerships. . . . While this may seem
paradoxical, the reason is that many mass appeal programs (e.g.,
gameshows or sitcom
[[Page 3594]]
reruns) are close substitutes for each other, and hence if many
viewers watch a mass appeal program on a distant signal, that merely
subtracts from, or ``displaces,'' the viewership of similar programs
on non-distant signals. Thus adding a distant signal station with
mass appeal programming merely shuffles existing viewers between the
added stations and other stations already carried by the CSO and
does not attract new viewers to the CSO's offerings. The rational
CSO would have no value for such a distant signal. In contrast, the
viewership of niche programs, no matter how small, represent ``new
eyeballs'' for the CSOs, as those viewers would not find similar
programs on other channels in the CSO's bundles. These viewers would
be among the ``new subscribers'' who may otherwise not initiate
service with the CSO if distant signal programming were not
available.
Shum WRT ] 12 (footnotes omitted).
Parties critical of using viewing as a measure of value point to
empirical evidence to corroborate arguments based on economic theory.
Dr. Wecker and Mr. Harvey demonstrate (based on Dr. Gray's analysis)
that paid programming (i.e., infomercials) had a higher viewing share
than JSC programming in three of the four years covered by this
proceeding. See Wecker Report ] 44 & Table 7. The JSC point out that,
according to Dr. Gray's theory equating viewership with value, cable
operators would place a higher value on paid programming than live
sports broadcasts, even though Mr. Allan Singer, a former cable
industry executive and JSC witness, testified that content such as
infomercials actually detracts from the value of a signal. Singer WRT ]
7. Mr. Singer also testified that there is ``clearly not'' a ``one-to-
one correlation between audience viewing levels and value,'' though it
is a ``component'' of value. 2/22/18 Tr. at 1047-48 (Singer). Mr.
Daniel Hartman, a media consultant and former DirectTV executive
testifying for the JSC, stated that ratings were ``definitely not a
determinative factor'' in a multi-channel video program distributor's
(MVPD's) negotiations with suppliers of programming. 3/12/18 Tr. at
3155-56 (Hartman). Nor do ratings figure into the rates that MVPD's pay
or the contractual terms and conditions they agree to when they
negotiate with suppliers of programming. Id. at 3156-57. CTV argues
that, while Program Suppliers' witness Sue Ann Hamilton testified to
the importance to cable operators of prospective viewing by
subscribers, she also stated that she did not obtain Nielsen data on
viewing of distant signals. CTV PFF ]] 147-148 (citing Hamilton WDT at
5-6; 3/19/18 Tr. at 4326 (Hamilton)).
Program Suppliers responded by holding to the position that
viewership is the most direct measurement of relative value of
programming for the reasons articulated supra,\155\ relying primarily
on Dr. Gray's and Ms. Hamilton's testimony in support of Dr. Gray's
viewing study. See, e.g., PS Reply PFF ] 129.
---------------------------------------------------------------------------
\155\ See supra, section IV.A.
---------------------------------------------------------------------------
2. Reliance on Incomplete Nielsen Data
On January 22, 2018, two weeks before the scheduled commencement of
the allocation hearing in this proceeding,\156\ Program Suppliers filed
a ``Third Errata'' to Dr. Gray's written direct testimony. See Third
Errata to Amended and Corrected Written Direct Statement and Second
Errata to Written Rebuttal Statement Regarding Allocation Methodologies
of Program Suppliers (Jan. 22, 2018) (Third Errata). The stated reason
for this Third Errata was that Dr. Gray had discovered that the Nielsen
viewing data he had been provided for his analysis did not include any
data for distant viewing of WGNA. Id. at 1; see also 3/14/18 Tr. at
3518 (Lindstrom). WGNA, the national satellite feed for WGN-Chicago,
was the most widely retransmitted distant signal in the U.S. during the
years covered by this proceeding.
---------------------------------------------------------------------------
\156\ The hearing had been scheduled to begin on February 5. The
Judges granted Program Suppliers' motion to delay the start of the
hearing until February 14 for reasons unrelated to Dr. Gray's Third
Errata. See Order Continuing Hearing and Permitting Amended Written
Rebuttal Statements, Denying Other Motions, and Reserving Ruling on
Other Requests (Jan. 26, 2018).
---------------------------------------------------------------------------
The SDC moved to exclude the Third Errata from evidence, arguing
that Program Suppliers were seeking to introduce ``substantial
revisions to its proposed allocation methodology'' and not ``mere
corrections of errors.'' Settling Devotional Claimants' . . . Motion to
Strike MPAA's Purported ``Errata'' to the Testimony of Dr. Jeffrey Gray
at 9 (Jan. 25, 2018). The SDC argued that, in addition to using a
Nielsen dataset that included WGNA viewing data, Dr. Gray proposed ``an
all-new regression in addition to the regression [he] previously
proposed, and a new sample weighting methodology underlying all of its
computations.'' Id. The Judges granted the SDC's motion and excluded
the Third Errata, reasoning that it was too late to introduce a new
analysis. See 2/15/18 Tr. at 232 (Barnett, C.J.); accord Order Granting
MPAA and SDC Motions to Strike IPG Amended Written Direct Statement and
Denying SDC Motion for Entry of Distribution Order, Docket Nos. 2012-6
CRB CD 2004-09 (Phase II), 2012-7 CRB SD 1999-2009 (Phase 2), at 5
(Oct. 7, 2016) (striking Amended Written Direct Statement that was
filed without leave and that introduced a substantially modified
regression specification).
As a result of the Judges' exclusion of the Third Errata, the
version of Dr. Gray's viewing analysis in the record is based on a
Nielsen dataset that does not include viewing data for WGNA. While it
is undisputed that the use of this incomplete dataset almost certainly
affected Dr. Gray's computations, the record does not reveal the
magnitude of the effect on each participant's viewing share.
Dr. Gray testified that, in spite of the missing WGNA data, his
viewing analysis produced viewing shares that were within a ``zone of
reasonable consideration.'' 3/14/18 Tr. at 3764 (Gray). He based his
opinion on ``a dramatic decline in compensable programming carried on
WGNA and a dramatic decline in viewing of WGNA programming, such that
it had become increasingly less important over time.'' Id. at 3763; see
also 3/14/Tr. at 3522 (Lindstrom) (``I haven't quantified it, but based
on past experience, I would say that . . . there wasn't much that was,
in fact, compensable programming that was on.''). In addition, Program
Suppliers argue that Dr. Gray's computed viewing shares were based on
accurate Nielsen data as to viewing on the remainder of the
approximately 150 stations in his sample for each year and were
reliable as to those stations. See PS PFF ] 109; 3/14/18 Tr. at 3525,
3537-38 (Lindstrom). Moreover, Dr. Gray testified that the Crawford and
Israel fee-based regression analyses, as modified by Dr. Gray, support
his estimated viewing shares as being within a zone of reasonableness.
See 3/14/18 Tr. at 3744-45 (Gray).
Other participants dispute this. The JSC point to evidence that,
while compensable Program Suppliers' programming declined in the 2010
to 2013 time frame (and as between that period and the 2004-05 period),
the amount of compensable JSC programming remained stable. See Cable
Operator Valuation of Distant Signal Non-Network Programming 2010-13,
Trial Ex. 1001, at 28 Table III-2 (Bortz Report); see also Hartman WRT
] 14, Table III-1 (telecasts of JSC programming on WGNA remain
relatively constant during 2010-13 and between 2010-13 and 2004-05).
The JSC argue that the omission of the WGNA data thus
disproportionately affected the JSC, as compared to Program Suppliers.
JSC PFF ] 162.
[[Page 3595]]
The SDC, through the testimony of their economist Dr. Erdem,
similarly argue that the absence of WGNA data is likely to
disproportionately bias the results against claimant categories with
smaller distant viewership. See Erdem WRT at 32.
Several experts testified that the imputed zero distant viewing
values that Dr. Gray input into his regression for the missing WGNA
data necessarily affected the predicted viewing that the regression
produced. See Wecker Report ] 33 (``choosing to code zero distant
viewing for large stations such as WGNA . . . created counterintuitive
associations within the data where stations with extremely large
distant subscribers are predicted to have low numbers of viewers''); 2/
22/18 Tr. at 1299-1300 (Harvey). Dr. Gray appears to have conceded this
point. See 3/15/18 Tr. at 4054-55 (Gray).
3. Reliance on Unweighted Nielsen NPM Data
The Nielsen data on which Dr. Gray relied was an extract from
Nielsen's NPM database. See 3/14/18 Tr. at 3685-88 (Gray). The NPM data
are derived from a geographically stratified sample of about 22,000
television households that is ``designed in such a way so that every
household in the United States has a probability of being selected''
and represents approximately 110 million U.S. television households.
Id. at 3507, 3539-40 (Lindstrom); 2/22/18 Tr. at 1179 (Harvey);
National Reference Supplement 2010-2011, Trial Ex. 2021, at 1-1
(Nielsen Supplement). A subset of the NPM data, known as Local People
Meter (LPM) data, is used for measuring viewership in the top 25 local
markets. 3/14/18 Tr. at 3556 (Lindstrom); Sanders WRT ] 6.viii. Nielsen
disproportionately oversamples the (mostly urban) LPM markets, with 600
to 1000 metered households in each. See Nielsen Supplement at 1-1;
Erdem WRT at 27.
a. Use of Nielsen NPM Data
Several witnesses opined that the NPM database is the wrong tool
for measuring local and distant viewing to individual television
stations because the NPM data are not designed to measure viewership in
local or regional markets. See Corrected Written Rebuttal Testimony of
Susan Nathan, Trial Ex. 1090, at 3, 5-6 (Nathan CWRT); 2/22/18 Tr. at
1180-81, 1213 (Harvey); Written Rebuttal Testimony of Ceril Shagrin,
Trial Ex. 2009, ] 24 (Shagrin WRT). Ms. Shagrin contended that an
appropriate sample to measure distant viewing would need to oversample
small markets, and the NPM does not oversample small markets.
Consequently, the NPM data could not produce a proper measure of
distant signal viewing. Shagrin WRT at ]] 18, 22, 24; 3/1/18 Tr. at
1778 (Shagrin).
The CCG and SDC both argued that their program categories are
underrepresented in the NPM sample design. See CCG PFF ] 200; SDC PFF
]] 130-131. By statute, Canadian television stations may only be
carried by cable systems within 150 miles of the U.S.-Canada border or
north of the forty-second parallel. 17 U.S.C. 111(c)(4). Many
communities within that ``Canadian Zone'' are not included in the NPM
sample. 3/15/18 Tr. at 4071-73 (Gray); Sanders WRT, App. E; Boudreau
CWDT at 87. Similarly, the SDC claim that many portions of the ``Bible
Belt'' are not included in the NPM sample. See Sanders WRT, ] 6.xi,
Apps. E-F.
More generally, some experts argued that Dr. Gray's use of the NPM
data resulted in a high number of instances of zero recorded viewing in
the data he fed into his regression algorithm. Viewing of distantly-
retransmitted signals is a relatively small phenomenon, and in many
regions the NPM had an insufficient number of metered households to
measure that viewing. See Nathan CWRT at 5-6, 8; Wecker Report ]] 21-22
& Table 4; 2/22/18 Tr. at 1180-81, 1183-84, 1252-54 (Harvey); Gray
CAWDT ] 35. Ninety-four percent of the quarter hour observations in Dr.
Gray's dataset showed zero recorded viewing, and only 0.96% of the
observations reported two or more distant viewing households. See
Wecker Report ]] 18, 21-22 & Table 4; Shum WRT ] 17; see also Bennett
WRT ] 49 & Fig. 16. Approximately 20% of the distantly-retransmitted
stations in Dr. Gray's sample have no recorded local or distant viewing
in the Nielsen data. See Shum WRT ] 18.
Dr. Gray, and Mr. Lindstrom of Nielsen,\157\ defended the use of
NPM data for measuring viewership of programs on distant signals. Dr.
Gray testified that he consulted with Nielsen concerning his selection
of data and the uses to which he intended to put it, and Nielsen found
his approach to be reasonable. See 3/14/18 Tr. at 3932-33 (Gray); 3/15/
18 Tr. at 3846 (Gray). He relied on his regression analysis to project
distant viewership values to quarter hours on stations in his sample,
including those stations in portions of the country that were not
included in the Nielsen NPM sample. See id. at 4073. Mr. Lindstrom
testified that Nielsen recommended the NPM database because ``it is
recognized that the meter is by far the best technology and best method
for being able to measure television usage.'' 3/14/Tr. at 3506
(Lindstrom). Mr. Lindstrom also testified that, while the NPM is a
measurement of nationwide viewing, ``all national viewing is inherently
aggregations of local usage. . . . It's all based on viewing built up
from a very localized level. . . . [I]f you believe in sampling--and
I'm a big believer in sampling--and the core methodology behind it,
that you are getting a very good measure of the viewing going on in
those homes and that when looked at in aggregate, it is a very solid
number.'' Id. at 3508-10.
---------------------------------------------------------------------------
\157\ Mr. Lindstrom retired in June 2017 after nearly 40 years
at Nielsen. See 3/14/18 Tr. at 3495-96 (Lindstrom). Prior to his
retirement, Mr. Lindstrom was a Senior Vice President in charge of
custom research and custom analysis for Nielsen's media business.
See id. at 3496. He testified in this proceeding with Nielsen's
``full cooperation and support.'' Id. at 3495.
---------------------------------------------------------------------------
Regarding the ``zero viewing'' criticisms, Dr. Gray testified that
instances of no recorded viewing are to be expected, and constitute
``information regarding the level of viewing for the Nielsen sample.''
3/15/18 Tr. at 3973 (Gray); see Gray CAWDT ] 35; 3/14/18 Tr. at 3717
(Gray). Similarly, Mr. Lindstrom explained that, given Nielsen's
sampling rates and the levels of distant viewing, one would expect a
large number of individual quarter-hour observations to show no
recorded viewing. He emphasized that it is necessary to aggregate and
average the observations to get an accurate picture of viewing. See 3/
14/18 Tr. at 3527-28 (Lindstrom). ``[I]f you believe in sampling, then
the aggregation is, in fact, going to give you solid results . . . .
[I]f you're going to look at the individual pieces, then the individual
pieces are highly subject to criticism because you're not supposed to
look at individual pieces.'' Id. at 3529.\158\
---------------------------------------------------------------------------
\158\ Program Suppliers also sought to cast doubt on the
experience and expertise of the witnesses who criticized Dr. Gray's
use of the NPM database for his viewing study. See, e.g., PS Reply
PFF ] 66 (``Ms. Shagrin testified that she had never worked on
custom analysis projects while at Nielsen, and that she did not
understand how Dr. Gray used Nielsen's custom analysis in his
methodology.'').
---------------------------------------------------------------------------
b. Application of Improper Sample Weights to the Nielsen Data
In order to project viewing data from sample households to the
broader television audience, Nielsen employs sophisticated weighting
schemes. ``The weights measure the number of people in the population
that are represented by each member of the sample. For example, if [a]
sample member has a weight of 20,000 for a selected day, this
[[Page 3596]]
means that on that day the sample member represents 20,000 in the
population.'' Nathan CWRT at 5 (quoting Nielsen online tutorial on
weighting (internal quotations and footnote omitted)). Dr. Gray was
supplied with Nielsen's national weights, but not with weights that
would permit accurate projection to local or regional markets. See 3/
14/18 Tr. at 3711, 3715-16 (Gray). He chose to use the unweighted
Nielsen data, rather than weights that would project to a national
audience. Dr. Gray testified that he was concerned that using the
national weights would produce anomalous results, where numbers of
projected viewers for a distant signal would, in some cases, exceed the
number of cable households that receive the signal on a distant basis.
See id. at 3715-16.
Ms. Susan Nathan, a media research consultant, agreed that it would
have been inappropriate for Dr. Gray to apply the NPM national weights
to data concerning distant viewing. See Nathan CWRT, at 9. However, Ms.
Nathan also found Dr. Gray's use of unweighted Nielsen data
inappropriate:
In arriving at his distant viewing estimates, Dr. Gray treats
each NPM sample household as equal--even though each NPM sample
household is not equal in Nielsen's sample design. Rather, each
household is representative of a different number of potential
viewers. Simply estimating the number of sample participants that
might view a given program is not an accurate means of estimating
viewership. By ignoring the weighting and assuming one people meter
household is the same as another, Gray also applies the unweighted
data in a manner for which it was not intended.
Id. Mr. Gary Harvey, a statistician and applied mathematician,
similarly criticized Dr. Gray's use of unweighted data: ``[B]ecause Dr.
Gray doesn't take into account any weighting . . . you don't know how
important that household is . . . for your particular area.'' 2/22/18
Tr. at 1182 (Harvey); see id. at 1201-02.
Dr. Gray responded that his decision to use the unweighted Nielsen
data was the best of three options available to him. He could have used
the sample weights in the NPM database, which project each quarter-hour
observation out to the number of households in the NPM survey that
particular Nielsen household represented on that particular day. Dr.
Gray was concerned that this would produce anomalous results, where the
predicted number of viewing households could exceed the number of
distant subscribers with access to that distant signal. See 3/14/18 Tr.
at 3714-15 (Gray). He could have used sample weights that project each
observation to the particular distant viewing market, but those weights
were not available from Nielsen, and would have been impracticable for
him to develop. Id. at 3715-16. Or he could have taken the approach
that he ultimately settled on and used the unweighted Nielsen data. See
id. at 3716. Dr. Gray pointed out that Nielsen used unweighted data in
a similar fashion in a previous proceeding and noted that, in any
event, he was not interested in the absolute number of viewer quarter
hours, but the relative level of viewing among the parties. See id. He
concluded that performing a regression on the unweighted Nielsen
viewing numbers was ``a reliable methodology to do so.'' Id.
4. Sample of Stations Biased Results
Dr. Gray selected his sample of stations using a statistical
technique called stratified random sampling. He ranked the universe of
distantly-retransmitted stations by numbers of distant subscribers,
divided the stations into strata proportionate to the number of distant
subscribers reached by the signal, and randomly selected stations from
each stratum. 3/14/18 Tr. at 3686 (Gray). He selected stations from the
stratum containing the stations with the most distant subscribers with
100% probability (i.e., he selected all of them). The probability of
selecting any given station declined with each succeeding stratum, with
the probability of selecting a given station in the final stratum
ranging from approximately 2.4% (i.e., 19 in 792) to approximately 3.5%
(i.e., 22 in 632). See Bennett WRT ] 28, Figs. 6-9. In order to account
for the differing probabilities of selection between the different
strata, Dr. Gray had to weight the viewing data. Data pertaining to the
largest stations, which were selected with 100% probability received a
weight of 1. Data pertaining to stations with a lower probability of
selection received a higher sample weight (the reciprocal of the
probability of selection). See 3/15/18 Tr. at 3964-65 (Gray). The
stations with the fewest number of distant subscribers, which had the
lowest probability of being selected, received the highest sample
weight, ranging from 28.73 to 41.68. See Bennett WRT ] 28, Figs. 6-9.
Use of a stratified random sample (with appropriate weighting) can
allow oversampling of elements with a given characteristic (in this
case stations with larger numbers of distant subscribers), while still
being able to make statistical inferences about the universe of
elements as a whole. However, Dr. Bennett, an economist and
econometrician who testified for CTV, criticized this approach, arguing
that Dr. Gray's sampling design is prone to error and bias and that Dr.
Gray made a number of errors implementing his sample. See generally
Bennett WRT.
a. Sample Design Led to a Biased Sample
Dr. Bennett describes Dr. Gray's sample design as an example of
``cluster sampling'' because Dr. Gray sampled stations (which air
multiple programs) rather than sampling programs directly. See Bennett
WRT ]] 15-16. Cluster sampling, according to Dr. Bennett, is ``more
prone to bias than simple random samples of equal size'' because
``individual clusters often contain a non-random and relatively
homogenous set of units.'' Id. ] 17, 18 & Fig.1. In the context of
television programming, Dr. Bennett observed that programs assigned to
particular claimant categories are often concentrated by station type
(i.e., Canadian, educational, network, independent, or low power).
Over- or under-sampling of stations of a particular type could thus
have a substantial impact on the volume and viewership share of the
categories of programming that are disproportionately carried on those
stations. Id. ] 18. If the sample of stations is not proportionately
representative of the station types in the population, the program
types will not be representative of the population of television
programs.
Dr. Bennett argues that Dr. Gray's samples of stations were, in
fact, not representative of the station types in the population. See
id. ] 29. Dr. Bennett offers as evidence of unrepresentativeness the
proportion of educational stations in Dr. Gray's samples in each year
as compared to the proportion of educational stations in the
population. He notes that Dr. Gray consistently under-sampled
educational stations in 2010, 2011, and 2013, and oversampled
educational stations in 2012. See id. ] 32 & Fig. 10. Conversely, he
finds that Dr. Gray over-sampled independent stations in 2010, 2011,
and 2013, and under-sampled them in 2012. See id. ] 34 & Fig. 11. Since
independent stations carry a greater proportion of Program Suppliers'
programs than other station categories, Dr. Bennett concludes that Dr.
Gray's computations of volume and viewership overstate those values for
Program Suppliers' programming. See id. ]] 39-42. Dr. Bennett opines
that Dr. Gray should have included station type as a stratification
variable to avoid potential bias. See id. ] 19.
[[Page 3597]]
Dr. Gray acknowledged that it would have been possible, as Dr.
Bennett suggested, to stratify with respect to program type. See 3/14/
18 Tr. at 3771 (Gray). However, he argued that not performing that
stratification did not render his sample biased. ``I'm appealing to
randomness. I think bias is a strong word.'' Id. He also acknowledged
that he could have done some ``post-sampling weighting, which would
have changed [the] estimate slightly,'' but did not do so. Id.
b. Sampling Frame and Sampling Weights Were Incorrect
Dr. Bennett points out (and Dr. Gray confirms) that some duplicate
stations were included in Dr. Gray's samples. See id. ]] 21-25 & Fig.
3; 3/15/18 Tr. at 3859-63 (Gray). This occurred, for example, when the
CDC data Dr. Gray received listed certain stations twice--once with a
``DT'' suffix after the call sign and once without (e.g., CBUT and
CBUT-DT). See Bennett WRT ] 24 & Fig. 4.
As a result of these duplicates, Dr. Bennett found that Dr. Gray's
sampling frame included more stations than were in his target
population.\159\ Bennett WRT ] 22. Dr. Bennett argues that the mismatch
of Dr. Gray's sampling frame and the population of distantly-
retransmitted stations rendered the sampling frame unsuitable to
represent the target population. Id. ] 21. Dr. Bennett argues that
``Dr. Gray's failure to remove duplicate stations . . . distorts his
count of unique stations, his assignment of stations to individual
strata, and the sampling weights that he calculates based on his
incorrect station count,'' which could affect Dr. Gray's analysis in
several ways:
---------------------------------------------------------------------------
\159\ ``A sampling frame is an enumeration of the items from
which a sample is selected. Ideally, the sampling frame will be
identical to--and therefore representative of--the target population
that one seeks to study.'' Bennett WRT at ] 21.
a. Double-counting some stations in the sampling frame, which
changed the likelihood of selection for all stations outside the top
stratum; and
b. Where both versions of the duplicative station were selected,
such as for CBUT . . . 2010, overrepresentation of the duplicate
station in the sample, and the exclusion of a non-duplicate station
from the sample; and
c. Incorrect sampling weights being applied to sampled stations
in strata with one or more of the duplicative stations.
Id. ] 25.
Dr. Bennett argued that ``the errors in Dr. Gray's sampling weights
are further compounded by the fact that Dr. Gray has dropped sampled
stations that did not have coverage in the Gracenote Data.'' Id. ] 26.
Over the four years at issue in this proceeding, Dr. Gray had to drop
between five and eight sampled stations per year (for a total of 24 of
his 609 sampled stations) because Gracenote could not provide
programming information for them. See id. ] 27. The omitted stations
were distributed unevenly across the sample strata and subject to
different sample weights. Dr. Bennett opines that Dr. Gray should have
adjusted his weighting to account for the number of missing stations
across the strata for each year. See id. ] 28. In addition, Dr. Bennett
testified that Dr. Gray failed to apply his sample weights in
performing his regression analysis, leading to biased results. See id.
]] 58-59.
Dr. Gray acknowledged the existence of duplicate stations in his
sample. See 3/15/18 Tr. at 3859 (Gray). He explained that at the time
that he drew the sample there were a number of stations that had the
same call signs with different suffixes, and, after consultation with
CDC and Nielsen, he was unable to determine whether or not they were
the same or different signals. See 3/14/18 Tr. at 3719-20. He opted to
treat them as different stations because, if he had treated them as the
same station and they proved to be different stations he would have had
to discard the sample and start over. Id. Having duplicate stations in
the sample effectively resulted in a smaller sample and a higher margin
of error. See id. at 3721; 3/15/18 Tr. at 3853-56 (Gray). Dr. Gray
testified, however, that the existence of duplicate stations did not
render his viewing estimates biased or incorrect. See 3/15/18 Tr. at
3859 (Gray).
Dr. Gray also acknowledged that the existence of duplicate stations
resulted in the application of different sample weights to different
subscriber groups that received the same signal. See id. at 3861-62. He
maintained, however, that applying differing sample weights did not
``make the make the estimated viewing biased or wrong.'' Id. at 3861.
Regarding his sampling weights, Dr. Gray acknowledged that he
should have recalculated them to reflect the removal of certain
stations from the sample for which data were unavailable. See id. at
3867. He opined that the difference would be de minimis, ``given the
types of stations that did not have programming data.'' Id. ``[E]very .
. . sensitivity analysis I ever did with respect to viewing had . . .
almost de minimis impacts. . . . I would not expect it to impact the
overall calculated shares.'' Id. at 3867-68.
Contrary to Dr. Bennett's assertion, Dr. Gray testified that he
applied his sample weights to the Nielsen data and maintained that
``it's an unbiased measure of viewing.'' Id. at 3861-62.
c. Erroneous Application of Random Sample to Geographic Stratified
Sample
Dr. Erdem criticized Dr. Gray's sampling technique because it
superimposed a random selection on a geographically-stratified
sample.\160\ He argued that the two sampling schemes are incompatible,
because ``[t]here is no guarantee that the stations in Dr. Gray's
sample were broadcast or retransmitted in the . . . geographic areas
sampled by Nielsen.'' Erdem WRT at 26. As a result, ``[l]ocal or
distant viewership would be underreported or completely missing if
geographies where a particular station is retransmitted are not sampled
by Nielsen.'' Id. Consequently, Dr. Erdem considered Dr. Gray's data
source to be ``practically unusable,'' and concluded that ``no reliable
conclusions can be drawn on the basis of the sample that Dr. Gray
uses.'' Id. at 25.
---------------------------------------------------------------------------
\160\ Nielsen's sample is a tiered sample of geographic areas,
see Erdem WRT at 25; see also 3/14/18 Tr. at 3507, 3539-40
(Lindstrom), unlike Dr. Gray's sample, which was stratified by the
number of distant subscribers. See 3/14/18 Tr. at 3686 (Gray).
---------------------------------------------------------------------------
Dr. Gray responded that Dr. Erdem's criticism ``would have been a
concern, had [he] not used regression analysis.'' 3/14/18 Tr. at 3718
(Gray). He conceded that ``Dr. Erdem has a legitimate point'' and that
it is not ``ideal'' to superimpose a random sample on top of a
geographic sample. Id. He testified, however, that he had overcome that
criticism by using regression analysis to predict viewing ``even in
those areas of underrepresentation by Nielsen.'' Id. at 3718-19. As a
consequence, he was not concerned about Dr. Erdem's criticism. Id. at
3719.
5. Other Methodological Errors
Experts for the other parties lodged a barrage of criticisms of a
variety of methodological choices that Dr. Gray made in performing his
analysis.
a. Imputation of Zeroes for Missing Nielsen Data
The NPM data that Nielsen provided to Dr. Gray included only
observations of positive viewing. See 3/14/18 Tr. at 3712 (Gray). For
several million station/quarter-hour pairings during the relevant
period there was no record of positive viewing in the NPM data. See
Wecker Report ] 21. Dr. Gray added zero-viewing records for these
station/quarter-hour pairings and used these zero values as input in
his regression analysis. See id.; Bennett WRT ] 53 & Fig. 17.
[[Page 3598]]
Dr. Bennett and Mr. Harvey both criticized this practice. Dr.
Bennett argued that ``Dr. Gray's practice of equating missing records
with zero viewing 1acks foundation and undermines the reliability of
his regression analysis. . . . Dr. Gray offers no logical explanation
for why zero might be the correct value to use in place of a missing
record.'' Bennett WRT ] 54. Dr. Bennett posited the existence of an
apparent contradiction: ``[E]ither the missing values truly correspond
to zero viewing and the regressions serve no purpose--why estimate a
known quantity--or the true values of the missing records potentially
differ from zero, in which case Dr. Gray has imposed an incorrect
assumption that biases the estimated relationship between distant and
local viewing.'' Id.
Mr. Harvey argued that Dr. Gray failed to demonstrate that a
sufficient number of NPM households received a given distantly
transmitted signal to conclude that the absence of viewership data
indicated zero viewing. 2/22/18 Tr. at 1203-07 (Harvey). ``[Y]ou might
have zero people meters, in which case [a zero viewing observation] is
useless data. . . .'' Id. at 1335. In Mr. Harvey's view, ``there is no
possible way to come up with some metric . . . for these smaller
samples without knowing the number of people meters. . . .'' Id.
Dr. Gray explained that ``[t]here was [sic] never any zeros in the
Nielsen data. They only have recorded viewing and non-recorded
viewing.'' 3/24/18 Tr. at 3712 (Gray). The data that Nielsen provided
to Dr. Gray were ``all recorded viewing values.'' Id. He testified that
the absence of an entry for recorded viewing for a given quarter hour
meant that ``there was no Nielsen household in the sample viewing''
that channel at that particular time. Id. In those cases he added an
entry with a zero-household count. See id. at 3712-13. Dr. Gray
distinguished between instances zero local viewing and data that was
``missing'' because local viewing for that channel was not measured by
Nielsen. See id. at 3895-97; 3/14/18 Tr. at 3717-18. In the latter
instance, he imputed a local rating based on the average local rating
for programs of the same type during that particular quarter hour. See
id.; 3/15/18 Tr. at 3897-3900 (Gray).
b. Incorrect Measure of Local Ratings
As an input for his regression analysis, Dr. Gray used a ``measure
of local ratings'' that he constructed by dividing local viewing (as
measured by Nielsen) by the size of the market--i.e., ``the number of
subscribers reached by the particular signal.'' See 3/14/18 Tr. at 3693
(Gray). Dr. Bennett clarifies that, by number of subscribers, Dr. Gray
refers to the total number of local and distant subscribers who receive
the signal. See Bennett WRT ] 56.
Dr. Bennett faults Dr. Gray's inclusion of the number of distant
subscribers in the denominator when calculating his measure of local
ratings. ``Dr. Gray's inclusion of distant subscribers in his `measure'
of local viewing means that, all else equal, he will assign higher
local viewing to a station with the fewest distant subscribers, and
vice versa.'' Id.
Dr. Gray maintained that, after consultation with Nielsen, he found
his measure of local ratings to be reasonable. See id. at 3932-33.
c. Regression-Based Estimates in Lieu of Nielsen Observations of
Positive Viewing
Dr. Gray computed his viewing shares based solely on the estimates
he computed using his regression analysis. He used the observations of
positive viewing in the Nielsen NPM data solely as an input into the
regression analysis, not in the final computation of viewing shares.
Dr. Bennett described this procedure as being ``without . . . support''
and argued that Dr. Gray's reliance on estimated viewing ``further
undermines the reliability of his viewing analysis.'' Id. ]] 50-51.
Specifically, Dr. Bennett argued that, as compared with the
observations of positive viewing in the Nielsen NPM data, Dr. Gray's
estimates are biased in favor of Program Suppliers and PTV programming,
and biased against CTV and CCG programming. See id. ] 64 & Figs. 21-22;
3/1/18 Tr. at 1874-75 (Bennett). Professor Shum reiterates the same
point with respect to CCG programming, arguing that Dr. Gray's analysis
systematically lowered estimates of distant viewing of Canadian signals
because (a) the regression undercounted local viewing by excluding
local viewing in Canada; (b) Canadian stations were underrepresented in
Dr. Gray's 2010 sample; and (c) Canadian signals cannot be carried
outside the Canadian Zone. See Shum WRT ]] 25-38. Professor Shum
proposes adjustments to Dr. Gray's viewing shares to account for the
first two purported defects, but he was unable to propose an adjustment
to account for the third. See id. ]] 29-30, 33-35, 38.
Dr. Gray maintained that basing his viewing shares on the predicted
viewing he computed through his regression analysis was both reasonable
and superior to using Nielsen's viewing estimates for that purpose. See
3/15/18 Tr. at 3940-41, 3943, 3948 (Gray). In particular, he argued
that, while Nielsen's measurements were of ``geographically-focused
areas,'' his regression analysis produces estimates of relative viewing
``throughout the United States.'' Id. at 3949. He acknowledged that his
regression would not produce particularly good estimates of the level
of distant viewing, but opined that his estimates were ``more accurate
on a relative basis for the United States.'' Id.; see id. at 3946,
3948.
d. Miscategorized Programs
Dr. Bennett asserts that Dr. Gray incorrectly assigned thousands of
programs to the wrong claimant categories. For example, he states that
Dr. Gray's algorithm failed to consider Gracenote's title and program
type fields when assigning programs to the CCG category and, as a
result, incorrectly assigned JSC programming on Canadian signals to the
CCG category. Bennett WRT ]] 44-45; see also Wecker Report ] 12 (Dr.
Gray included nearly all MLB, NHL, NBA, and NFL broadcasts on Canadian
signals in the CCG category); 2/22/18 Tr. at 1169-70 (Harvey) (``Dr.
Gray was very clear in his testimony that he intended to code Canadian
broadcasts of Major League Baseball games and football games into the
JSC Category, but he did not do that.''); Bennett WRT ] 18, n.11
(``obvious program categorization errors'' in table showing 20 CTV
programs on Canadian stations and 5 Devotional programs on Educational
stations). In addition, Dr. Bennett states that Dr. Gray didn't
consider whether a program coded as ``religious'' was syndicated before
he assigned it to the Devotional category. Dr. Bennett asserts that
nonsyndicated religious programming belongs in the CTV category. Id. ]
46.
Dr. Gray compared the category classification that he performed to
Dr. Bennett's. He found that their respective algorithms assigned
programs to the same category 93.5% of the time. See Gray CWRT ] 50. As
to the programs where Dr. Gray's categorization differed from Dr.
Harvey's, Dr. Gray was unable to determine which categorization was
correct with undertaking a program-by-program review.\161\ See id.
Instead, Dr. Gray performed a sensitivity analysis to determine whether
using Dr. Bennett's categorizations would have an impact on his (Dr.
Gray's) share calculations. See id. ] 51. Using Dr. Bennett's program
categorizations resulted in a modest increase in Program Suppliers'
[[Page 3599]]
viewership share in each royalty year, ``consistent with no bias in
intent on the part of Dr. Bennett or me.'' Id. ] 52.
---------------------------------------------------------------------------
\161\ Dr. Gray testified about a number of specific instances in
which his categorization differed from Dr. Bennett's, and, on
further review, he stood by his categorization. However, he did not
perform a comprehensive review. See 3/14/18 Tr. at 3721-23 (Gray).
---------------------------------------------------------------------------
D. Analysis
1. Relevance and Impact of Prior Decisions
Program Suppliers' use of viewing data to propose allocations of
cable royalties among program categories has a long, if not illustrious
history. MPAA (to use the Program Suppliers' contemporaneous
designation) first offered a Nielsen study in the Copyright Royalty
Tribunal's (CRT) adjudication of 1979 cable royalties. See 1979 Cable
Royalty Distribution Determination, 47 FR 9879, 9880 (Mar. 8, 1982). At
that time the CRT found Nielsen's viewership study to be the ``single
most important piece of evidence in [the] record.'' Id. at 9892. Over
time, however, decision makers' (first the CRT, then the CARPs)
reliance on Nielsen studies waned. See 1998-99 CARP Report, supra note
144, at 33 (recounting history of use of Nielsen studies by CRT and
CARPs). In 2003 a CARP, with the approval of the Librarian of Congress
(Librarian) declined to use the Nielsen study as a direct measure of
relative value of programming to cable operators:
[T]he Nielsen study does not directly address the criterion of
relevance to the Panel. The value of distant signals to CSOs is in
attracting and retaining subscribers, and not contributing to
supplemental advertising revenue. Because the Nielsen study ``fails
to measure the value of the retransmitted programming in terms of
its ability to attract and retain subscribers,'' it can not be used
to measure directly relative value to CSOs. The Nielsen study
reveals what viewers actually watched but nothing about whether
those programs motivated them to subscribe or remain subscribed to
cable.
Id. at 38 (citations omitted). Or, as the Librarian summarized
pithily, ``[t]he Nielsen study was not useful because it measured the
wrong thing.'' 1998-99 Librarian Order, 69 FR at 3613.
More recently the Judges have relied upon evidence of viewership in
a pair of ``Phase II'' distribution cases.\162\ In the 2000-03 cable
Phase II distribution case, the Judges concluded that ``viewership, as
measured after the airing of the retransmitted programs is a
reasonable, though imperfect proxy for the viewership-based value of
those programs.'' Distribution of 2000, 2001, 2002 and 2003 Cable
Royalty Funds, 78 FR 64984, 64995 (Oct. 30, 2013) (2000-03 Cable Phase
II Decision) (footnote omitted). The Judges agreed with Program
Suppliers' expert in that case \163\ that ``viewership can be a
reasonable and directly measurable metric for calculating relative
market value . . . . Indeed, the Judges conclude that viewership is the
initial and predominant heuristic that a hypothetical CSO would
consider in determining whether to acquire a bundle of programs for
distant retransmission . . . .'' Id. at 64996. Similarly, in the 1998-
99 Phase II proceeding, the Judges found a viewership analysis to be an
``acceptable `second-best' measure of value'' for distributing funds
allocated to the devotional programming category among claimants in
that category. See Distribution of 1998 and 1999 Cable Royalty Funds,
80 FR 13423, 13432-33 (Mar. 13, 2015) (1998-99 Cable Phase II
Decision).
---------------------------------------------------------------------------
\162\ Prior to the cases to determine allocation and
distribution of 2010-13 cable and satellite royalties the Judges and
their predecessors referred to the process of dividing royalties
among program categories as ``Phase I,'' and the process of dividing
royalties allocated to a program category among the claimants within
that category as ``Phase II.'' When the Judges decided to conduct
both processes simultaneously for 2010-13 cable and satellite
royalties they decided to refer to them as the ``allocation phase''
and ``distribution phase,'' respectively, to avoid any expectation
that the processes would be carried out sequentially.
\163\ Then, as now, the Program Suppliers' principal witness
regarding the analysis of Nielsen viewership data was Dr. Gray.
---------------------------------------------------------------------------
The Copyright Act mandates that the Judges act
on the basis of a written record, prior determinations and
interpretations of the Copyright Royalty Tribunal, Librarian of
Congress, the Register of Copyrights, copyright arbitration royalty
panels (to the extent those determinations are not inconsistent with
a decision of the Librarian of Congress or the Register of
Copyrights), and the Copyright Royalty Judges (to the extent those
determinations are not inconsistent with a decision of the Register
of Copyrights that was timely delivered to the Copyright Royalty
Judges pursuant to section 802(f)(1)(A) or (B), or with a decision
of the Register of Copyrights pursuant to section 802(f)(1)(D)),
under this chapter, and decisions of the court of appeals. . . .
17 U.S.C. 803(a)(1). In interpreting a nearly identical provision under
the CARP system,\164\ the Librarian stated that ``[w]hile the CARP must
take account of Tribunal precedent, the Panel may deviate from it if
the Panel provides a reasoned explanation of its decision to vary from
precedent.'' Distribution of 1990, 1991 and 1992 Cable Royalties, 61 FR
55653, 55659 (Oct. 28, 1996) (1990-92 Librarian Order) (citation
omitted). In a subsequent decision, the Librarian observed that ``prior
decisions are not cast in stone and can be varied from when there are
(1) changed circumstances from a prior proceeding or; (2) evidence on
the record before it that requires prior conclusions to be modified
regardless of whether there are changed circumstances.'' 1998-99
Librarian Order, 69 FR at 3613-14.
---------------------------------------------------------------------------
\164\ The earlier provision, former section 802(c) of the
Copyright Act, stated that CARPs ``shall act on the basis of . . .
prior decisions of the Copyright Royalty Tribunal, prior copyright
arbitration panel determinations, and rulings of the Librarian . . .
.''
---------------------------------------------------------------------------
As an initial matter, the Judges find that the 1998-99 CARP Report
and the 1998-99 Librarian Order are relevant ``precedent'' \165\ that
the Judges must consider in connection with Dr. Gray's analysis of
Nielsen viewing data; the 1998-99 Cable Phase II Decision and the 2000-
03 Cable Phase II Decision are not. The task of distributing royalties
among a reasonably homogeneous group of programs differs from that of
allocating royalties among heterogeneous categories, and different
considerations apply to each. See Indep. Producers Grp. v. Librarian of
Congress, 792 F.3d 132, 142 (DC Cir. 2015) (IPG v. Librarian);
Distribution of 1993, 1994, 1995, 1996 and 1997 Cable Royalty Funds, 66
FR 66433, 66453 (Dec. 6, 2001).
---------------------------------------------------------------------------
\165\ The decision whether or not to accept a methodology for
determining relative market value is factually-dependent, so it is a
misnomer to describe a previous decision declining to rely on
viewership as ``precedent''--i.e., controlling under the principle
of stare decisis. Nevertheless, it is a ``prior determination'' ``on
the basis of '' which Congress has directed the Judges to act (along
with the written record and other items enumerated in the statute).
See 17 U.S.C. 803(a)(1).
---------------------------------------------------------------------------
In considering Dr. Gray's viewing study, therefore, the Judges are
mindful of the earlier decisions that found viewership studies
unhelpful in allocating royalties among program categories. In
particular, the Judges examine whether there is record evidence that
would compel a different conclusion in the present case.\166\
---------------------------------------------------------------------------
\166\ No party has alleged changed circumstances that would bear
on the Judges' reliance, vel non, on viewing data.
---------------------------------------------------------------------------
2. Rejection of Viewership as a Measure of Relative Value
Although the record supports a conclusion that viewership is a
measure of value, the weight of the evidence demonstrates that it is an
incomplete measure of value.
The Judges agree in principle with Dr. Gray that the focus of the
relative market value inquiry is on the hypothetical market in which
copyright owners license programs to broadcasters for retransmission by
cable operators. See 3/14/18 Tr. at 3683-84 (Gray). Experts from
multiple parties agreed that, in the hypothetical market, cable
operators would continue to acquire
[[Page 3600]]
entire signals, rather than individual programs. See id. at 3683; 2/28/
18 Tr. at 1377-78 (Crawford); 3/5/18 Tr. at 2157-58 (George). In this
market structure copyright owners' compensation (the object of this
proceeding) would flow from broadcasters to copyright owners, and would
be recouped through the retransmission fee charged by the broadcaster
to the cable operator. See 3/14/18 Tr. at 3682-84, 3779-81 (Gray).
That market does not exist in a world with a compulsory license, so
there is no evidence of the surcharge that broadcasters would pay to
copyright owners for the right to license distant retransmissions. Most
parties have used the transaction in which a cable operator acquires
the right to retransmit programming as a proxy. Program Suppliers, by
contrast, focus on the consumer demand for programs as measured by
viewership.
At bottom, Dr. Gray's study is premised on the truism that,
ultimately, programming is acquired to be viewed. See Gray CAWDT ] 13.
Consumers subscribe to cable in order to watch the programming carried
on the various channels provided by the cable operator. Cable operators
acquire broadcast and cable channels that carry programming their
subscribers want to view. Broadcasters acquire programs that will
attract viewers.\167\ Viewing is the engine that drives the entire
industry. It is an example of the economic concept of derived demand.
The demand for programming at each step in the chain is derived from
demand further along the chain, all the way to the television viewer.
Program Suppliers corroborated Dr. Gray's economic insight with
evidence that at least some MVPDs consider viewership metrics in making
program acquisitions.
---------------------------------------------------------------------------
\167\ Broadcasters' reasons to attract viewers are driven by
advertising-revenue considerations rather than subscriber attraction
and retention considerations.
---------------------------------------------------------------------------
Consequently, based on the evidence presented in this proceeding,
the Judges disagree with the Librarian's statement that viewership
studies are not useful because they ``measure [ ] the wrong thing.''
1998-99 Librarian Order, 69 FR at 3613. Viewership is no less relevant
to the question of how a copyright owner would be compensated by a
broadcaster in the hypothetical market than to the question of what a
cable operator would be willing to pay to a broadcaster. Both are
relevant because the copyright owner's compensation would be a function
of downstream demand in the hypothetical market.
However, even accepting that viewership is relevant to the question
of value doesn't end the inquiry. There is record evidence supporting
the contention that, in the analogous market for cable channels, cable
operators will pay substantially more for certain types of programming
than for other programming with equal or higher viewership. See
Crawford WRT ] 36 & Fig. 1.\168\ These empirical data support economic
arguments about the role of bundling and ``niche'' programming in cable
operators' decision making. See Shum WRT ]] 10-12; Connolly WDT ]] 31-
32; Crawford CWDT ] 7. It is clear to the Judges that relative levels
of viewership do not adequately explain the premium that certain types
of programming can demand in the marketplace. In short, viewing doesn't
provide the whole picture.
---------------------------------------------------------------------------
\168\ See also discussion of Dr. Israel's ``cable content
analysis,'' supra, section V.
---------------------------------------------------------------------------
The Judges conclude, therefore, that viewership, without any
additional evidence to account for the premium that certain categories
of programming fetch in an open market, is not an adequate basis for
apportioning relative value among disparate program categories.
3. Rejection of Dr. Gray's Study due to Incomplete Data
The Judges also must reject Dr. Gray's study because he computed
his predicted distant viewing on the basis of incomplete data.
Specifically, the use of erroneous zero viewing observations for
compensable WGNA programming rendered Dr. Gray's results unreliable.
WGNA was, by far, the most widely retransmitted signal in the U.S.
during the period covered by this proceeding, reaching over 40 million
distant subscribers. See Wecker Report, ] 23. That provided an
opportunity for any compensable program retransmitted on WGNA to be
viewed by a substantial number of households. Yet nearly none of those
compensable programs were credited with any positive distant viewing on
WGNA in Dr. Gray's regression. The Wecker Report, moreover,
demonstrates that there were significant amounts of positive distant
viewing in Nielsen's NPM database for programs carried on WGNA. See id.
] 26 & App. G. As Dr. Wecker and Mr. Harvey demonstrated, the numerous
zeros for distant viewing on WGNA that were input into Dr. Gray's
regression, combined with the use of the number of distant subscribers
as a variable in the regression specification, created an erroneous
negative correlation between distant subscribership and distant
viewing. See id. ]] 33; 2/22/18 Tr. at 1299-1300 (Harvey); see also 3/
15/18 Tr. at 4054-55 (Gray) (appearing to concede point).
The aggregate effect of the missing WGNA data on Dr. Gray's
predictions of distant viewing, and on the viewing shares he computed
therefrom, cannot be determined with any certainty from the record. It
was incumbent on Program Suppliers to demonstrate that the effect of
the missing WGNA data did not have a substantial influence on Dr.
Gray's results. They failed to do so. Program Supplier's efforts to
argue, essentially, that the omission of the WGNA data was harmless
error are unavailing. The JSC rebutted Dr. Gray's assertion that
compensable programming on WGNA had declined significantly, showing
that JSC programming on WGNA remained stable during the 2010-2013
period. See Bortz Report, at 28 Table III-2. The Wecker Report rebutted
Dr. Gray's assertion that his computed viewing shares were accurate as
to the non-WGNA stations in his sample. See Wecker Report, ]] 33. As
for Dr. Gray's assertion that his viewing analysis produced viewing
shares that were within a ``zone of reasonable consideration,'' 3/14/18
Tr. at 3764 (Gray), the ``zone of reasonableness'' is a legal construct
that is solely within the purview of the Judges. Dr. Gray's views on
what lies within or without a zone of reasonableness are immaterial.
4. Other Asserted Methodological Defects
As recounted above,\169\ several experts identified what they found
to be methodological errors in Dr. Gray's analysis, including his
decision to use Nielsen NPM data and not to apply Nielsen's weighting
to that data; his sample design and application of sampling weights;
his program categorization; his imputation of zero viewing values to
quarter hours not represented in the Nielsen data; and his substitution
of regression-based predicted distant viewing values for the observed
distant viewing in the Nielsen data. Because the Judges have found an
adequate basis for rejecting Dr. Gray's viewing study based on its
failure to provide a complete measurement of value, and its reliance on
incomplete data, the Judges do not need to evaluate the remaining
critiques.
---------------------------------------------------------------------------
\169\ See sections 0-0.
---------------------------------------------------------------------------
E. Conclusion Concerning Viewing Study
Dr. Gray's viewing study provides an incomplete and therefore
inadequate measure of relative market value of disparate categories of
distantly-
[[Page 3601]]
retransmitted programming. While viewing is relevant to value, it does
not adequately measure the premium that cable operators are willing to
pay for certain types of programming in the analogous market for cable
channels.
Even if viewing were an adequate basis for apportioning value among
program categories, Dr. Gray's study is fatally flawed by its reliance
on Nielsen data that omitted distant viewing on WGNA--the most widely
retransmitted station in the United States.
For the foregoing reasons, the Judges will not rely on Dr. Gray's
viewing study for apportioning royalties among the program categories
represented in this proceeding.
V. Cable Content Analysis
Dr. Israel also undertook an analysis that he characterized as a
``Cable Content Analysis''--focusing on the dollar amount paid by CSOs
to carry sports and other programming during the years 2010-13. More
particularly, for the years 2010-13 he considered the amounts that
cable networks spent per hour of programming televised in relation to
total household viewing hours (HHVH). Israel WDT ] 45. As explained in
more detail, infra, Dr. Israel concluded that CSOs place a high value
per hour on live sports programming compared with other program
categories. He further opined that his Cable Content Analysis presented
results that were consistent with the share estimates determined by the
Bortz Survey. Israel WDT ] 46.
More particularly, according to Dr. Israel, his Cable Content
Analysis demonstrated that in each year of the 2010-13 period, CSOs
networks paid significantly more per hour for JSC programming than for
any other category of programming. Making this point in an alternative
manner, Dr. Israel testified that the JSC's programming share of CSO
expenditures was larger than the JSC programming share of CSO broadcast
minutes or HHVH. Israel WDT ] 46.
Table V-5 of Dr. Israel's WDT, set forth below, compares total
program hours, total HHVH, and total CSO expenditures for JSC
programming with all other categories of programming on the top twenty-
five cable networks:
Table 17--Cable Content Analysis 2010-2013, Summary of Top 25 Networks
----------------------------------------------------------------------------------------------------------------
Total Expenditures Expenditures
Category programming Total HHVH Expenditures per hour of per hour of
hours % (000) % ($M) % programming viewing
[A] [B] [C] [D] = [E] =
[C] / [A] [C] / [B]
----------------------------------------------------------------------------------------------------------------
JSC............................. 9,274.0 15,164,368.9 $12,524.7 $1,350,517.6 $0.826
Non-JSC......................... 866,726.0 496,492,970.2 42,702.0 49,268.2 0.086
JSC / Non-JSC................... 0.01 0.03 0.29 27.41 9.60
JSC % of Total.................. 1.06 2.96 22.68 .............. ..............
----------------------------------------------------------------------------------------------------------------
Israel WDT ] 47 Table V-5.
As this table shows, for the top twenty-five cable networks, JSC
programming represents approximately 1% of all programming in terms of
hours transmitted and less than 3% of total HHVH. Nonetheless, these
top twenty-five cable networks applied more than 22% of their
programming budgets to acquire the rights to transmit JSC programming.
Dr. Israel further highlighted the importance of JSC programming to
these cable networks, relative to other categories, by expressing the
data on a per hour basis. Dividing total expenditures by total hours of
programming per category, he showed that expenditures per hour of JSC
programming are worth more than 27 times other programming categories.
Dr. Israel also calculated these expenditures per hour of household
viewing and found that JSC programming was worth almost 10 times more
per hour of viewing than all other programming categories on the top
twenty-five cable networks. Israel WDT ] 47; Table 17, supra.
Dr. Israel also looked more granularly at two cable networks, TBS
and TNT, which he noted (without opposition) carried a mix of JSC and
other program categories. His analysis showed patterns that were
similar to what he had found with regard to the top twenty-five cable
networks, viz., that JSC programming was far more valuable than all
other program categories. Specifically, during the years 2010-13, JSC
programming accounted for approximately 2% of the total programming
hours transmitted by TBS, and about 3% of the total programming hours
transmitted by TNT. In terms of viewership, the JSC generated roughly
5.5% of total HHVH on TBS during the four-year period and about 7.9% on
TNT. In contrast to these relatively small percentages of programming
and viewing hours, TBS spent 44.4% of its 2010-13 programming budget on
JSC programming, and TNT quite similarly spent 45.5%. Once again,
expressing these choices on an hourly basis, expenditures per hour of
JSC programming were more than 40 times greater than expenditures per
hour of all other programming on TBS, and expenditures per hour of JSC
programming were almost 30 times greater than expenditures per hour of
all other kinds of programming on TNT. In terms of expenditures per
HHVH, TBS spent more than 13 times as much on JSC programming than on
other program categories, and TNT spent almost 10 times as much
compared with its spending on other program categories. Israel WDT ] 48
& Table V-6.
According to Dr. Israel, these absolute and relative differences
are reflected in ``the significantly higher license fees that cable
systems and other MVPDs [Multichannel Video Programming Distributors]
pay to carry these networks.'' Israel WDT ] 51. Dr. Israel presented
data to support this point, analyzing the 97 nationally and regionally
distributed cable networks with a minimum of 50 million subscribers in
2013. Of these 97 networks, he found that 14 offered telecasts of JSC
events and 83 did not. Over the full 2010-13 period, Dr. Israel found
that the average license fee for the 14 cable networks that offered JSC
programming (along with other programming) was $0.753 per subscriber
per month, whereas for the 83 cable networks that did not offer JSC
programming, the average license fee over the four year period was much
lower, $0.174 per subscriber per month. Israel WDT ] 51.
[[Page 3602]]
In opposition, Program Suppliers asserted that this analysis ``is
irrelevant to this proceeding.'' PSPFF ] 354. In support of this
argument they rely on Dr. Gray's assertion that ``consistent with
Professor Crawford's economic arguments, after negotiating programming
deals with cable networks carrying live team sports programming, CSOs
may then have a sufficient quantity of that type of programming to
bundle for its current and potential subscribers [such that] live team
sports programming would be less valuable to CSOs than other types of
programming.'' Gray CWRT ] 60.
In response to this opposition, the JSC asserted that Dr. Gray had
misapplied Professor Crawford's explanation that CSOs have an incentive
to add differentiated distant signal programming to their bundles
``because it can help to attract and retain subscribers.'' JSC RPFF ]
46 & n.174 (and record citations therein). More particularly, the JSC
argued that Program Suppliers' argument regarding program-type
saturation would not apply only to JSC programming. As they asserted:
``[T]hat argument would apply equally to [Program Suppliers] (and
others), whose content likewise is on cable networks in addition to
local and distant signals; it provides no basis to ascribe a lower
relative value to JSC.'' JSC PFF ] 50 (and record citations therein).
The Judges understand Dr. Israel's Cable Content Analysis to be in
the nature of an assertion that a similar market provides relevant and
meaningful information regarding the relative values of distantly
retransmitted local programs in a hypothetical market in which the
statutory royalty structure did not exist. As such, Dr. Israel's
approach is similar to the ``benchmark'' approach that is a hallmark of
the sound recording and musical works rate proceedings within the
Judges' jurisdiction. That is, parties in those proceeding regularly
present economic evidence regarding royalty rates in other markets,
urging the Judges to find sufficient comparability between the
``benchmark'' market and the hypothetical market at issue. When Judges
decide whether and how to weigh such benchmark evidence, they begin
with the following foundational analysis that is equally applicable
here:
In choosing a benchmark and determining how it should be
adjusted, a rate court must determine [1] the degree of
comparability of the negotiating parties to the parties contending
in the rate proceeding, [2] the comparability of the rights in
question, and [3] the similarity of the economic circumstances
affecting the earlier negotiators and the current litigants, as well
as [4] the degree to which the assertedly analogous market under
examination reflects an adequate degree of competition to justify
reliance on agreements that it has spawned.
In re Pandora Media, 6 F. Supp. 3d 317, 354 (S.D.N.Y. 2014), aff'd sub
nom., Pandora Media, Inc. v. ASCAP, 785 F.3d 73 (2d Cir. 2015).
In the present case, Dr. Israel has not attempted to make such a
structured analysis. Rather, the Judges understand his argument to be
based on the assumption that the rights at issue are comparable (i.e.,
the programs can be categorized in a similar manner) and the buyers/
licensees (the CSOs) are identical in both markets. However, in all
other respects--regarding economic circumstances, competitive
positions, and the nature of the seller/licensor--the relative
similarities or differences are unexplored.
Accordingly, the Judges are reluctant to put much weight on Dr.
Israel's Cable Content Analysis. At most, the Judges rely on his Cable
Content Analysis as demonstrating that JSC programming enjoys a level
of demand out of proportion to its broadcast minutes, not inconsistent
with the results of his regression analysis and Dr. Crawford's
regression analysis.
VI. Changed Circumstances
The Judges and their predecessors have looked at a ``changed
circumstances'' analysis in prior proceedings. In the 1998-99 cable
distribution proceeding, the CARP recommended allocation to the four
largest categories strictly based on the Bortz survey results.\170\
Because PTV and CCG were undervalued by the Bortz survey, the CARP
recommended adjustment of allocations to those categories, giving
``some weight'' to the remarkable increases in relative fee generation
and in ``changed circumstances'' as measured by an increase in
subscriber instances.\171\ See Final Order, Distribution of 1998 and
1999 Cable Royalty Funds, 69 FR 3606, 3617 (Jan. 26, 2004). In the
2000-03 distribution proceeding, the Judges salvaged consideration of
changed circumstances by differentiating a fee generation methodology
from a changed circumstances evidentiary consideration. See
Distribution Order, \172\ 75 FR 26798, 26805-07 (May 12, 2010) (2000-03
Distribution Order). Ultimately, the CARP concluded that changed
circumstances, as measured by changes in subscriber instances alone,
revealed a change in programming volume, which did not necessarily
translate to a change in programming value. 1998-99 Librarian Order, 69
FR at 3616.
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\170\ SDC did not challenge the relative share indicated by the
Bortz results. 1998-99 Librarian Order, 69 FR at 3609 n.15.
\171\ A ``subscriber instance'' as used in these proceedings
relating to distant signal retransmission means one subscriber
having access to one distant signal.
\172\ The 2000-03 Distribution Order was a ``Phase I'' or
category allocation determination.
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In the present proceeding, PTV retained Ms. Linda McLaughlin and
Dr. David Blackburn, who filed joint written testimony. See Trial Ex.
3012. The McLaughlin/Blackburn report focused on the share of royalties
that would reflect the relative value of PTV programming only. See 3/7/
18 Tr. at 2446 (McLaughlin). McLaughlin and Blackburn began with the
PTV share from the 2004-05 distribution proceeding, which was based
largely on Bortz survey results. See Amended Testimony of McLaughlin
and Blackburn, Trial Ex. 3007 at 7 (McLaughlin/Blackburn AWDT). Using
primarily data from the Cable Data Corporation (CDC), they analyzed not
just changes in subscriber instances, but external changes in various
unit measures from 2005 to the relevant period, 2010-13, viz., distant
subscriber instances, distant signal transmissions, and the balance of
programming types distantly retransmitted. See id. at 7-8. Each of
their unit measures indicated an increase in the PTV relative share,
and all of their unit measures indicated a basis for an increase in
PTV's relative share for the period at issue in this proceeding. As Ms.
McLaughlin testified, however, an increase in unit measures does not
compel a conclusion that value also increased. 3/7/18 Tr. at 2648
(McLaughlin).
For valuation, McLaughlin and Blackburn analyzed survey results,
regression analyses, and viewership studies. For survey analysis, they
used the 2004-05 Bortz survey as a starting point. The Bortz Survey
omitted respondents whose distantly retransmitted signal carried only
PTV or only CCG or only PTV and CCG together.\173\ McLaughlin and
Blackburn added those omitted stations to the Bortz Survey results,
using the overall Bortz response rates by stratum, and by assuming, for
example, that the PTV-only systems would assign a relative value to PTV
of 100%.\174\ They then
[[Page 3603]]
recalculated the Bortz Survey relative value for PTV, by stratum, using
the relative values she determined. McLaughlin and Blackburn noted that
the increase resulting from their augmentation of the Bortz Survey
yielded a smaller PTV relative value (9.9%) than did the Horowitz
Survey (15.8%), which included PTV- and CCG-only systems from the
outset. They attributed this discrepancy to the participation bias
evident in the Bortz data, i.e., that fewer eligible systems carrying
PTV responded to the Bortz Survey than the Horowitz Survey. See
Rebuttal Testimony of McLaughlin and Blackburn, Trial Ex. 3002, at 4
(McLaughlin/Blackburn WRT).
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\173\ Ms. McLaughlin estimated that the average number of
omitted stations over the period 2010-13 was 16 per year. See 3/5/18
Tr. at 2457 (McLaughlin).
\174\ Ms. McLaughlin also assumed that CCG-only systems would
assign a relative value of CCG at 100%. 2/20/18 Tr. at 719-20
(Mathiowetz); 3/6/18 Tr. at 2291 (Frankel). In fact, not all
Canadian programming falls within the CCG category for royalty
purposes. CCG conceded that, for example, some programming broadcast
on Canadian stations should rightfully be attributed to the SDC. 3/
7/18 Tr. at 2675 (Erdem); Boudreau CWDT at 3-4, 10. The volume of
mischaracterized programming is not great, but, as Professor
Mathiowetz pointed out, a change in the relative allocation to any
one category necessarily changes the allocation to other categories.
2/20/18 Tr. at 701 (Mathiowetz).
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On rebuttal, McLaughlin and Blackburn noted that their own
calculations augmenting the Bortz survey probably also underestimated
the relative value of PTV, because they originated with the 2004-05
Bortz survey, which was tainted with participation bias. See id. at 4.
McLaughlin and Blackburn asserted that participation bias also
discounted the value of the 2010-13 Bortz Survey as an accurate measure
of the relative value of PTV programming. Id. at 5.
McLaughlin and Blackburn looked at Professor Crawford's econometric
study to confirm that marginal value per minute of distantly
retransmitted programs changed in a like manner to her unit
measurements. She noted increases in relative value from Dr.
Waldfogel's 2004-05 regression analysis, on the one hand, and Professor
Crawford's and Dr. Israel's regression analyses on the other: 20.8%
under Professor Crawford's analysis and 15% using Dr. Israel's
analysis. 3/7/18 Tr. at 2472-73 (McLaughlin). As Ms. McLaughlin
testified, the Crawford study establishes a price, from which value may
be ascertained: ``value is . . . a quantity times a price. . . . '' 3/
7/18 Tr. at 2653 (McLaughlin).
Ms. McLaughlin opined that viewership is just another unit measure,
not a valuation. Nonetheless, she contended that the results of Dr.
Gray's viewership analysis were consistent with the survey and
regression analyses, indicating a PTV relative market value of 12.6%.
See McLaughlin/Blackburn WDT at 23.
The Judges find that quantifying changes in various unit measures,
while not without corroborative value, is not a definitive approach to
relative valuation, especially in comparison to other more probative
approaches, such as regression analyses. Apparently, PTV ultimately
made the same assessment. See PTV PFF ] 11 (``[Professor] Crawford's
econometric framework is the best suited methodology to determine the
claimants' shares in this proceeding for the years 2010 through
2013.''). Accordingly, the Judges consider PTV to have adopted
Professor Crawford's regression analysis as the methodology on which it
has relied in this proceeding.
VII. Nonparticipation Adjustment for PTV
In its proposed findings of fact and conclusions of law, PTV raised
the issue of Basic Fund allocation adjustment to account for PTV not
being a participant in the 3.75% Fund. See PTV PFF/PCL at ]] 43-45.
Although there was mention of the 3.75% Fund in the record of the
proceeding, no party addressed the issue comprehensively. The Judges
issued an order seeking additional briefing, including an inquiry about
both the 3.75% Fund and the Syndex Fund. See Order Soliciting Further
Briefing (Jun. 29, 2018) (June 29 Order). Specifically, the Judges
asked
[w]hether the interrelationship between and among the Basic Fund,
the 3.75% Fund, and the Syndex Fund affects the allocations within
the Basic Fund, if at all, and, if so, how that affect should be
calculated and quantified.
June 29 Order at 1. The Judges expressly asked for legal analysis of
the issue. The Judges refused to allow introduction of any new evidence
but agreed to accept affidavits, if appropriate, to clarify the record
evidence of any witness. Id. at 2.
In their responses, the parties agreed that only Program Suppliers
were entitled to any royalties in the Syndex Fund and that the size of
the fund was so insignificant in context that the Judges should not
make any adjustment to allocations in the Basic Fund to compensate for
any party's exclusion from the Syndex Fund. See, e.g., SDC Brief at 1
n.1; SDC Responsive Brief at 5 (``given the minuscule amount of money
in the Syndex Fund, any calculation to compensate for that fund would
constitute nothing more than a rounding error to a second or third
decimal place. . . .''). The parties offered analysis and argument
regarding the 3.75% Fund.
The essence of the Judges' question is whether the record evidence
was intended to propose an allocation of all royalty funds in all three
funds, which might imply an adjustment to the Basic Fund allocations
for parties that did not participate in the other two funds. Program
Suppliers submitted affidavits from their witnesses asserting that
their analysis focused on the Basic Fund only. Accordingly, according
to the Program Suppliers' argument, the Judges should simply scale the
Basic Fund allocation by eliminating PTV from the calculation of
allocation percentages for the 3.75% Fund. See Program Suppliers'
Responsive Brief at 6. PTV and the SDC both argued contrariwise that
the Judges should scale the Basic Fund up for PTV. PTV/SDC derived
their argument from prior allocation determinations. See PTV Brief at
5-7; SDC Brief at 1-5.
All parties agree that the PTV category is ineligible for an
allocation of royalties assigned to the 3.75% Fund.\175\ The Judges
found, however, that the parties did not agree whether PTV's
nonparticipation in the 3.75% Fund affects the allocations within the
Basic Fund. Moreover, the Judges found that the arguments and evidence
presented by the parties was insufficient for the Judges to resolve the
issue. That problem was compounded by the fact that prior
determinations, regarding how the 3.75% Fund allocations might affect
the Basic Fund allocation, were themselves contradictory and did not
address all the issues the Judges have concluded are relevant.
Consequently, on June 29, 2018, the Judges entered an Order soliciting
further briefing regarding:
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\175\ The five parties eligible to share the royalties allocated
to the 3.75% Fund (CCG, CTV, JSC, Program Suppliers, and the SDC)
agree that, to reflect PTV's nonparticipation in the 3.75% Fund, the
Judges must adjust each eligible group's share of that fund in
proportion to its respective share of the Basic Fund. See 2004-05
Distribution Order, 75 FR at 57071; Declaration of Howard Horowitz ]
4 (Jul. 13, 2018); Declaration of Jeffrey S. Gray ] 8 (Jul. 16,
2018); see also JSC Initial Brief at 3-4. The Judges apply this
approach in allocating shares in the 3.75% Fund in the present
proceeding.
Whether the interrelationship between and among the Basic Fund,
the 3.75% Fund, and the Syndex Fund affects the allocations within
the Basic Fund, if at all, and, if so, how that affect should be
---------------------------------------------------------------------------
calculated and quantified.
Order Soliciting Further Briefing (Jun. 29, 2018) (3.75% Fund
Order).\176\ In
[[Page 3604]]
accordance with the 3.75% Fund Order, the parties filed briefs and
responding briefs on these issues, The Judges weighed the parties'
arguments and based on their analysis, the Judges do not adjust PTV's
share of the Basic Fund to reflect its nonparticipation in the 3.75%
Fund or to reflect any alleged inconsistencies between the record
evidence, on the one hand, and the separate allocations to the Basic
Fund and the 3.75% Fund, on the other.
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\176\ The parties agreed that Program Suppliers are entitled to
receive 100% of the remaining royalties from the Syndex Fund.
Further, the amount in that Fund, less than $10,000 per six-month
accounting period, see JSC Initial Brief at 2 n.1, is so low that,
even assuming arguendo allocations to the Syndex Fund would require
an adjustment to the Basic Fund, such an adjustment would be
``inconsequential.'' CTV Initial Brief at 11 n.20; see also SDC
Initial Brief at 1 n.1 (the Syndex Fund comprises ``only about 0.01%
of total royalties paid in 2010-2013.''). Accordingly, the
discussion in this section is limited to the impact, if any, of the
allocations to the 3.75% Fund on the allocations in the Basic Fund.
---------------------------------------------------------------------------
A. Arguments of the Parties
The parties disagree as to how, if at all, the scaling of the 3.75%
Fund allocations might affect allocations in the Basic Fund. PTV argues
that it is entitled to an ``Evidentiary Adjustment,'' \177\ whereby its
share of the Basic Fund is ``bumped up'' \178\ to offset its
nonparticipation in the 3.75% Fund. PTV Initial Brief at 1-2. PTV
alleges that this increase is necessary because ``[t]he surveys and
econometric estimates of value to CSOs determine shares of the Combined
Royalty Funds for each of the programming claimants'' and that ``[a]s a
result, in order for PTV to receive the share of total value to CSOs
estimated by the . . . experts, it must receive a larger share of the
Basic Fund, since it will receive no share from the [3.75% Fund].'' Id.
at 7 (quoting McLaughlin/Blackburn WDT at 24-25). In addition, PTV
maintains that it is entitled to this Evidentiary Adjustment regardless
of whether the Judges allocate the Basic Fund shares based on survey
evidence, regression evidence, or viewing evidence. PTV Responding
Brief at 12-21. PTV also argues that this result is supported by
precedent and by the record in this proceeding. PTV Initial Brief at
10-16.\179\
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\177\ PTV broadly defines the phrase ``Evidentiary Adjustment''
as the process by which ``the Judges must . . . convert the
[evidentiary] studies' estimated shares based on the `Combined
Royalty Funds' [i.e., estimated without explicit regard to an
itemization among the three specific funds] to shares tailored to
the particular funds from which the parties are entitled to
recover.'' Id. at 1. For the sake of clarity, the Judges utilize the
phrase ``Evidentiary Adjustment'' more narrowly in this
Determination, to mean only the potential bump up of PTV's share of
the Basic Fund to account for its nonparticipation in the 3.75%
Fund.
\178\ Of course, because the Basic Fund is finite, any bump up
in PTV's share would necessitate a decrease in the percentage
allocations to the other five claimant groups proportionate to their
relative shares (inter se) of the Basic Fund.
\179\ The Judges discuss the relevant prior rulings, infra,
section 0.
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JSC, CTV, and the SDC agree that prior rulings support PTV's
assertion that it is entitled to a bump up in its Basic Fund share, but
only to the extent the Judges tie the Basic Fund allocations to the
Bortz Survey results and no other allocation methodology.\180\ Those
parties maintain that the language in prior rulings supports such an
adjustment only to that limited extent. See JSC Initial Brief at 7-8;
CTV Initial Brief at 10; SDC Initial Brief at 9-10.
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\180\ In prior rulings by the Judges and the Librarian (in the
CARP era), the Bortz survey was the only survey of CSO
representatives given any credence. In the present case, the
Horowitz Survey also surveyed CSO representatives. The Judges find
no basis to treat these two surveys differently in connection with
the issue of whether PTV should receive an increase in its Basic
Fund share to account for its nonparticipation in the 3.75% Fund.
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By contrast, CCG argues that, in light of the evidence presented,
PTV's Basic Fund shares should be adjusted upward, regardless of the
allocation methodology employed by the Judges, to account for PTV's
non-participation in the 3.75% Fund. See CCG Initial Brief at 6.
At the other extreme, Program Suppliers oppose any increase in
PTV's Basic Fund share, arguing that such an increase ``effectively,
albeit indirectly, compensates PTV for royalties to which it is not
entitled.'' Program Suppliers Initial Brief at 2. Further, Program
Suppliers argue that relevant prior rulings that may have suggested PTV
was entitled to this upward adjustment were based on incorrect
reasoning and that none of them ``rises to the level of controlling
precedent.'' Id. at 7; see Program Suppliers Responding Brief at 2.
Finally, arguing in the alternative, Program Suppliers assert that,
even under PTV's view of the relevant prior rulings, PTV would not be
entitled to the Evidentiary Adjustment it seeks unless ``PTV's Basic
Fund share was derived solely from the Bortz Survey.'' Program
Suppliers Initial Brief at 7.
B. Analysis
1. Statutory Law and Regulations
Any upward adjustment of PTV's share of the Basic Fund to account
for its non- participation in the 3.75% Fund would be inconsistent with
the regulations that established the 3.75% Fund because CSOs are
expressly exempted from paying into the 3.75% Fund for the distant
retransmission of noncommercial educational stations. See 37 CFR
387.2(c)(2).\181\
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\181\ The original regulatory text was located in 37 CFR, part
308. See 37 CFR 308.2(c)(2). In 2016, the Judges recodified this
provision in Part 387, without changing the relevant language. See
Adjustment of Cable Statutory License Royalty Rates, 81 FR 24523
(April 26, 2016); Adjustment of Cable Statutory License Royalty
Rates 62812 (Sept. 13, 2016) (Note that the CFR version of Part 387
erroneously lists the second Federal Register page cite as page
62813.).
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More particularly, the CRT established the 3.75% Fund in 1982 to
offset the negative economic effects on owners of copyrights on
commercial programming arising from the FCC's elimination of its rule
setting a ceiling on the number of distant commercial stations a CSO
could retransmit. See Final Rule, Adj. of the Royalty Rate for Cable
Sys., 47 FR 52146 (Nov. 19, 1982). The regulation implements
Congressional policy as expressed in 17 U.S.C. 801(b)((2)(B), which
provides that ``[i]n the event that the . . . [FCC] . . . permit[s] the
carriage by cable systems of additional television broadcast signals
beyond the local service area . . . the royalty rates established by
section 111(d)(1)(B) may be adjusted to ensure that the rates for the
additional [DSEs] resulting from such carriage are reasonable in light
of the changes effected by the [FCC] . . . . ''). See also Malrite T.V.
of New York, Inc. v. FCC, 652 F.2d 1140, 1148 (2d Cir. 1981) (``The
plain import of Sec. 801 is that the FCC, in its development of
communications policy, may increase the number of distant signals that
cable systems can carry and may eliminate the syndicated exclusivity
rules, in which event the [CRT] is free to respond with rate
increases.'').\182\
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\182\ In economic terms, the new 3.75% Fund royalties substitute
a tariff for a quota, in order to maintain some form of protection
of the value of copyrights on local commercial programs in markets
into which CSOs would now be able to retransmit an unlimited number
of commercial stations from distant locales.
---------------------------------------------------------------------------
Thus, any upward adjustment in the Basic Fund by the Judges to
``compensate'' PTV--i.e., non-commercial stations--would constitute an
unlawful back-door attempt to modify this regulation and would be
inconsistent with the statutory provision on which it is based. See
generally 5 U.S.C. 706(2)(A) and (C) (agency action unlawful if ``not
in accordance with law'' or ``in excess of statutory jurisdiction,
authority, or limitations, or short of statutory right.'').
2. Administrative Process
Even assuming arguendo that applicable statutory law permits the
adjustment PTV seeks, any such adjustment would amount to an
adjudicatory change to an economic policy that was created through a
separate administrative rulemaking proceeding initiated for the express
purpose of protecting only those copyright owners who, as a result of
FCC action, lost the protection afforded by the ceiling on the number
of a CSO's distant retransmissions of commercial broadcasts. See 47 FR
52146. The Judges
[[Page 3605]]
will not shoehorn a de facto change in the regulations in this
adjudicatory proceeding by permitting PTV to share in the royalty
revenue collected by the levy of the ``penalty rate'' \183\ of 3.75% of
gross receipts.
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\183\ See, e.g., PTV Initial Brief at 4 (3.75% rate ``sometimes
called the `Penalty Rate' '' because it applies higher royalty rate
``to the retransmission of additional distant signals beyond the
limited number that cable systems could carry under the [f]ormer FCC
Rules.'').
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3. Unauthorized Redistribution of Wealth and Income
Any adjustment upward to PTV's Basic Fund allocation to account for
its nonparticipation in the 3.75% Fund would amount to a redistribution
of wealth and income by the Judges that is not authorized by law or
regulation. That is, any reduction in the Basic Fund royalties paid to
owners of copyrights on programs distantly retransmitted on commercial
stations to ``compensate'' PTV for its nonparticipation in the 3.75%
Fund would constitute the imposition of an economic loss on the former
and an economic windfall on the latter, in terms of the value of the
program copyrights (a redistribution of wealth) and the flow of
royalties realized from such ownership (a redistribution of income).
The Judge find no basis in law to support such a transfer of wealth or
income.
PTV argues though that ``[n]othing could be further from the
truth'' than the characterization of its position as seeking to share
in the 3.75% Fund. PTV Responding Brief at 5. In point of fact, PTV's
argument is tantamount to an attempt to appropriate value from the
3.75% Fund. Although PTV does not seek a ruling that it is legally
entitled to share in the 3.75% Fund, it seeks a ruling that it is
economically entitled to appropriate value from the Basic Fund, as
measured by its non-participation in the 3.75% Fund. The Judges are as
concerned with the economic incidence of the application of the so-
called Evidentiary Adjustment as they are with the legal incidence of
PTV's attempt to appropriate wealth and income from a fund that, by
law, belongs to other claimants.\184\
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\184\ The distinction between economic incidence and legal
incidence is typically exemplified in the analysis of sales taxes.
The seller bears the legal incidence by writing a check to the
governmental unit assessing the tax, but the seller and the consumer
share the economic incidence of the sales tax, the latter paying a
portion of the tax in the form of a higher prices for the taxed
item, with the allocation of the economic incidence between merchant
and consumer determined by the elasticity of demand for the taxed
item. See R. Posner, Economic Analysis of Law at 491-495 (6th ed.
2003). Analogously, the economic incidence of PTV's argument is
transparent; although the legal incidence of its argument--bumping
up its Basic Fund share--is not expressly prohibited, 100% of the
economic incidence of its argument is a shift to itself wealth and
income from the lawful participants in the 3.75% Fund.
---------------------------------------------------------------------------
In the face of the foregoing points, PTV and all the other parties
except Program Suppliers nonetheless argue that two factors--evidence
and precedent--support the subsidy sought by PTV. The two arguments are
considered below.
4. The Evidence-Based Argument
As an initial matter, the Judges note that the evidence-based
argument asserted by PTV and other parties in support of the
Evidentiary Adjustment cannot overcome the legal points, discussed
above, that make it legally impermissible to bump up PTV's share of the
Basic Fund.
Additionally, the Judges find the evidence-based argument made by
and on behalf of PTV, standing alone, to be insufficient. Broadly, PTV
and other parties assert that the Evidentiary Adjustment is
necessitated by the purported nature of the survey evidence and the
regression evidence.\185\ The Judges reject this argument.
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\185\ Again, PTV makes the same argument with regard to the
viewing evidence. However, that issue is moot, because, as explained
supra, the Judges do not apply the viewing evidence in making
allocations.
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a. The Survey Evidence
With regard to the survey evidence, PTV notes that the survey
questions did not explicitly ask the respondents to ``differentiat[e]
between the Basic, 3.75% and Syndex Rates,'' and ``their responses
presumably were based on their past payments at all rates into the
Combined Royalty Funds.'' PTV Initial Brief at 10-11 (emphasis added);
see also CTV Initial Brief at 6 (survey responses measure relative
value of distant signals ``without regard to the royalty rate paid for
any particular signal''). According to this argument, the survey
responses could not reflect the effects, if any, of the higher royalty
rate of 3.75% of gross receipts paid by CSOs into the eponymous 3.75%
Fund. Rather, according to this argument, the survey responses
reflected relative value in the combined royalty funds. Therefore, PTV
asserts that it is entitled to the Evidentiary Adjustment, bumping up
its Basic Fund allocation to offset the economic effect of its
nonparticipation in the 3.75% Fund.
The Judges find this argument to lack sufficient merit. The two
surveys were designed to allow for the selection of respondents to the
surveys who were the individuals most responsible for programming
carriage decisions at the CSO. See Bortz Survey at 14-15 & App. B;
Horowitz WDT at 9, 24; see also 2/15/18 Tr. 254 (Trautman); 3/16/18 Tr.
4109 (Horowitz). Neither survey was designed to question whether the
individuals who self-reported in fact possessed this knowledge, or to
test the extent or specific aspects of respondents' knowledge.
The Judges decline to presume, in the context of this 3.75% Fund
dispute, that the survey respondents lacked knowledge as to the
variable royalties paid for distantly retransmitted stations, when the
accepted survey evidence upon which the Judges rely (the same type of
survey evidence on which their predecessors have consistently relied)
presumes the opposite, i.e., that the respondents are indeed
knowledgeable regarding this sector of the cable industry.\186\ Indeed,
the argument that the Judges should presume that the survey respondents
were ignorant of the impact on royalty costs of retransmitting a given
number of distant local stations \187\ also proves too much, because it
would call into question any reliance on the survey evidence.
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\186\ The Judges part company with the CARP determination
(adopted by the Librarian), allocating royalties for 1998 and 1999,
in which the CARP stated that the adjustment is warranted because
``the Bortz respondents . . . presumably did not know that PTV would
not be eligible to receive part of their budget allocation . . . .
'' Distribution of 1998-1999 Cable Royalties, at 26 n.10 (Oct. 21,
2003), adopted by the Librarian 69 FR 3606 (Jan. 26, 2004). When the
Judges have qualified and relied upon expert survey witnesses, the
Judges cannot, without contrary evidence, inject a presumption
inconsistent with their qualifications. The Judges consider that and
other prior rulings infra.
\187\ The Judges find no reason to presume that survey
respondents who were otherwise deemed by the survey experts, based
on answers to introductory questions, to be knowledgeable about
their programming and carriage decisions, would not also be aware
that they could add an educational station without incurring the
higher 3.75% royalty, whereas the addition of a commercial station
in certain instances did trigger the 3.75% royalty. All parties
accepted, and the Judges agreed, that the individuals responsible
for making distant retransmission decisions for the cable systems
understood that the CSO paid the minimum fee of 1.064%, regardless
of whether they distantly retransmitted any local stations. It would
be inconsistent to presume, on the one hand, that CSO executives
were cognizant of a 1.064% minimum fee, but were ignorant of the
3.75% rate--more than 300% greater than that minimum fee--when the
responsible executives answered the surveys.
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Moreover, the Bortz Survey includes a question--Question #3--in
which the respondents are directed to consider the costs associated
with the retransmission of categories of programs. Although the
question is linked to the cost of program categories rather than the
cost of retransmitting entire stations, the question was designed as a
``warm-up'' question that would encourage
[[Page 3606]]
respondents to be cognizant of the costs associated with their
decisions to distantly retransmit stations containing the categories
represented in this proceeding. See Bortz Survey, App. at 15. Thus, the
Bortz Survey evidence tends further to support the assumption that the
respondents were cognizant of the costs, including the royalty costs,
associated with retransmitting distant local stations.\188\
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\188\ Although Question #3 referred to program categories, it is
still relevant to the 3.75% Fund issue, because only the five other
claimant categories (i.e., other than PTV) could have triggered the
higher royalty cost. Thus, a knowledgeable survey respondent could
not be presumed to lack knowledge of the different impact on value
from adding an educational station rather than a commercial station.
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For these reasons, the Judges cannot adopt a presumption that the
survey respondents, deemed knowledgeable in all other pertinent
respects regarding distant retransmissions of local stations, were
ignorant of the royalty costs associated with the number and type of
local stations they carried. Thus, there is not a sufficient
evidentiary predicate for the application of the Evidentiary
Adjustment.\189\
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\189\ In response to the Judges' 3.75% Fund Order, Program
Suppliers submitted a Declaration by Howard Horowitz, who designed
the Horowitz Survey, in which he stated that it is ``appropriate''
to apply the allocation of the Horowitz Survey shares ``to any fund
in which all parties participate.'' Declaration of Howard Horowitz ]
4 (July 16, 2013). This statement would support the Judges'
decision, but the Judges give no weight this declaration, for two
reasons. First, Mr. Horowitz did not offer any such testimony during
the proceeding; therefore his declaration is impermissible new
testimony (not clarifying testimony). Second, in the absence of
persuasive hearing testimony, Mr. Horowitz cannot opine as to what
would be the ``appropriate'' allocation of the Horowitz Survey
shares. What is an appropriate allocation in this context is a
question of law reserved to the Judges.
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b. The Regression Evidence
Turning to the Crawford and Israel regressions, PTV's arguments
fare no better. As the SDC explained in its briefing: ``Each regression
includes an indicator for retransmission of a 3.75% signal [with]
statistically significant coefficients for the indicator variables
suggest[ing] that there is a systematic difference in the amount of
royalties paid by systems and subscriber groups that retransmit 3.75%
signals and those that do not.'' SDC Initial Brief at 4. Thus, the
Crawford and Israel regression analyses demonstrated a correlation
between the amount of royalties paid by a CSO and its participation in
the 3.75% Fund. This correlation is essentially tautological. CSOs who
pay the higher 3.75% royalty rate for the distant retransmission of one
or more additional commercial local stations (previously ``non-
permitted'' under the since-repealed FCC ``ceiling'' regulation) will
pay higher royalties than CSOs that pay no more than 1.064% to
retransmit such stations. See id. (correlation is ``not surprising,
considering that retransmission of a 3.75% signal by definition carries
a higher rate''). Moreover, Dr. Crawford confirmed that the coefficient
for the 3.75 control variable in his regression analysis was both large
and statistically significant. Crawford WDT at App. B Fig. 22.\190\
---------------------------------------------------------------------------
\190\ CTV, on whose behalf Dr. Crawford undertook his regression
analysis, argues in its briefing that Dr. Crawford's 3.75% Fund
coefficient ``may already be accounted for to some degree'' in his
overall regression analysis. CTV Responding Brief at 7 (emphasis
added). Not only is this statement highly conditional (as noted by
the italicized language, CTV also did not submit a supporting
declaration from Dr. Crawford properly clarifying how his hearing
testimony supported this assertion, despite the Judges' invitation
in the 3.75% Fund Order to submit witness statements. Instead, CTV
referred to Dr. Crawford's hearing testimony on an unrelated issue
in which he stated, with regard to a different control variable,
that its coefficient estimate should be included in a regression
analysis when there are ``good'' economic and statistical reasons to
do so. See 2/28/18 Tr. 1643 (Crawford). The Judges do not dispute
this point, but it is not relevant to the task at hand. As an
indicator (dummy) variable in a regression designed to generate
estimates for relative value results among program categories, the
3.75% Fund variable was designed to control for the influence of the
3.75% Fund impact on those relative values. Dr. Crawford further
testified that any control variable that would correlate
significantly with the dependent variable should be included in the
regression model so that it does not bias the coefficients of
interest (the program categories' coefficients in the present case),
Id. at 1644 (Crawford). Thus, the excerpt from Dr. Crawford's
testimony, when considered in context, does not demonstrate that the
impact of participation in the 3.75% Fund is already ``accounted
for'' in his overall regression analysis in a manner relevant to the
present issue.
---------------------------------------------------------------------------
Likewise, Dr. Israel ``[s]imilar to Dr. Waldfogel,'' included an
indicator variable ``for whether a CSO pays the special 3.75 percent
fee,'' and he held this factor ``constant'' in order to determine the
extent of any correlation between royalty payments and additional
minutes of programming category content. Israel WDT ]] 33-34. In his
regression model, Dr. Israel estimated a coefficient of 41,918 for his
``Indicator for Special 3.75% Royalty Rate,'' multiple times the
coefficients he estimated for any other variable. Id. ] 36, Table V-1.
Thus, the regression evidence in the hearing records provides
independent support for distinguishing the allocations in the 3.75%
Fund from the allocations in the Basic Fund. Accordingly, the
regression evidence provides substantial support for rejecting PTV's
proposed bump-up in its Basic Fund allocation to offset its non-
participation in the 3.75% Fund.\191\
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\191\ The Judges emphasize a distinction between their
consideration of the 3.75% Fund regression coefficients and their
evaluation of the various coefficients relied on by Dr. Erdem to
predict the level of royalty payments. The Judges discounted Dr.
Erdem's emphasis on coefficients relating, for example, to the
number of CSO subscribers, because such coefficients, as Dr.
Crawford testified, simply re-created the royalty formula. However,
now the Judges are called upon to distinguish and apply a separate
royalty formula--the formula for the 3.75% Fund--from the formula
for the Basic Fund. In this latter context, the coefficients related
to the 3.75% Fund are indeed relevant. Accordingly, what constituted
vice in the critique of the Crawford regressions with regard to
allocations among the program categories is virtue in distinguishing
between two different categories of rate formulas.
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5. The Effect of Prior Decisions
The second argument raised by PTV and supported by several other
parties, is that the Judges are bound by prior decisions of CARP
panels, the Librarian, and the Judges, in which the Evidentiary
Adjustment was either applied or found to be generally valid. PTV
Initial Brief at 10-12; PTV Responding Brief at 9-12; JSC Initial Brief
at 4-6; CTV Brief at 1-6; SDC Initial Brief at 1-7. That is, they argue
that prior rulings, by the force of their reasoning or as controlling
law, require the Judges to bump up PTV's share of the Basic Fund to
account for its non-participation in the 3.75% Fund.
More particularly, PTV and other parties make this argument in
several alternative forms, from broad to narrow. PTV and CCG argue that
prior rulings support increasing PTV's share of the Basic Fund to
reflect not only the survey-based allocations but also the regression-
based allocations, whereas JSC, CTV, and the SDC assert that PTV's
survey-based allocations should be bumped-up, only to the extent the
Judges apply the survey share percentages in making their overall
allocations.
The Judges conclude that there is neither controlling law nor any
prior determination or other ruling that binds them on this issue.
Further, the Judges do not agree with the explanations in two prior
rulings that applied or legitimized the application of the Evidentiary
Adjustment. To the extent those prior rulings might, arguendo,
constitute controlling law or might, arguendo, have properly applied or
legitimized the Evidentiary Adjustment on the record in those cases,
the Judges find those rulings distinguishable, based on the particular
facts of the present case.
a. The 1986 CRT Determination
In a 1986 determination regarding the distribution of 1983
royalties, the CRT ruled that public television (represented by PBS in
that proceeding) was not entitled to participate in the 3.75%
[[Page 3607]]
Fund because ``non-commercial educational stations could be carried on
an unlimited basis prior to FCC deregulation, and . . . no cable
operator paid the 3.75% rate to carry any noncommercial stations.''
1983 Cable Royalty Distribution Proceeding, 51 FR 12792, 12813 (Apr.
15, 1986), aff'd sub nom. Nat'l Ass'n of Broadcasters v. CRT, 809 F.2d
172, 179 n.7 (2d Cir. 1986) (``because cable carriage of noncommercial
educational stations was not limited by the old distant signal rules,
PBS is not eligible for royalties at the new 3.75% rate''). Further,
there was no argument by the parties, and no discussion in the 1986
determination, with regard to the issue at hand, viz. whether PTV
should receive an upward adjustment to its Basic Fund allocation to
account for its non-participation in the 3.75% Fund. See 51 FR 12792 et
seq.
Accordingly, the Judges find no aspect of the 1986 determination to
be on point with regard to whether PTV is entitled to an upward
adjustment in its Basic Fund share to offset its non-participation in
the 3.75% Fund. Indeed, the 1986 determination would be consistent with
the rejection of such an adjustment.
b. The 1992 CRT Determination
The next CRT determination concerned distribution of cable
television royalties for the 1989 year. 1989 Cable Royalty Distribution
Proceeding, 57 FR 15286 (Apr. 27, 1992). PBS was again denied any share
of the 3.75% Fund ``because PBS stations are not paid for at the 3.75%
rate . . . . '' 57 FR at 15303.
In this 1992 case, public television claimants, through PBS,
requested the bump up in their adjustment to the Basic Fund that is at
issue in the present proceeding, i.e., ``to back out the 3.75%
portion'' from the Basic Fund. See 57 FR at 15300. The CRT rejected
this proposed adjustment, relying on the testimony of Paul Bortz
(president of the entity that administered the Bortz Survey), who
stated that ``there was nothing in his survey to suggest that
respondents were considering their 1989 copyright payment as the fixed
budget they were allocating.'' Id.
The Judges find this rationale to be cryptic at best, because there
is no obvious logical link between Mr. Bortz's description of the
mindset of the CSO survey respondents and its impact on whether PBS's
share of the Basic Fund should have been adjusted upward to reflect the
survey evidence. In fact, Mr. Bortz's testimony could be construed as
supportive of the upward adjustment in the public television claimants'
share of the Basic Fund. Accordingly, the Judges do not find any
controlling or persuasive authority in the 1992 determination that can
serve as guidance in the present proceeding.
c. The 1990-92 CARP Report and the Librarian's Order
In the proceeding to allocate royalties for the 1990-1992 period,
PTV argued on behalf of public television claimants for an Evidentiary
Adjustment to its share of the Basic Fund, as that share was estimated
by the CARP's reliance on the Bortz Survey.\192\ The CARP ruled, with
regard to the question of whether to adjust PTV's share of the Basic
Fund:
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\192\ While this proceeding was pending, Congress abolished the
CRT. The proceeding continued under the auspices of the CARP
appointed to distribute the royalties.
PTV also contends that a further adjustment should be made in
its award because its total share of the adjusted Bortz Survey must
come entirely from the Basic Fund and the Bortz survey does not
differentiate between the Basic fund and the 3.75 fund in which PTV
does not participate.
. . .
PTV's proposed further adjustment to allow for its non-
participation in the 3.75 fund is rejected for the same reason given
by the [CRT] in the 1989 proceeding. Mr. Bortz specifically
disavowed any intention or implication in his survey to have
respondents answer based on their royalty payments.
1990-92 CARP Phase I Distribution Report 120, 124 (Jun. 3, 1996) (1990-
92 CARP Report). The Judges find that the CARP's reliance on the prior
reasoning of the CRT only serves to repeat the cryptic nature of that
prior ruling, and does not offer any basis on which the Judges may rely
to resolve the issue in this proceeding.
When Congress instituted the CARP process, it also charged the
Librarian with the duty to accept or reject, in whole or in part, the
decision of a CARP, and charged the Register with the duty to provide
recommendations to the Librarian. 17 U.S.C. 802(f) (2003) (superseded).
Discharging her duty in that 1990-92 proceeding, the Register made
specific recommendations to the Librarian regarding the issues
pertaining to the 3.75% Fund, all of which the Librarian adopted. The
Register described, and the Librarian agreed, that the CARP's reasoning
supporting its distribution of the 3.75% Fund was ``at best, terse.''
Distribution of 1990, 1991 and 1992 Cable Royalties, 61 FR 55653, 55662
(Oct. 28, 1996) (Librarian's Order).
In her recommendations, the Register more specifically addressed
the issue at hand, rejecting PTV's request for the Evidentiary
Adjustment.
The Panel did not act arbitrarily in rejecting PBS's \193\ Bortz
adjustment for the same reasons articulated by the [CRT] in 1989. .
. . [T]he approach used in the Bortz survey itself remained
unchanged. As in the 1989 proceeding, Bortz did not ask cable
operators to base their program share allocation according to the
royalties they actually paid. Thus, in awarding PBS programming a
specific share, a [CSO] did not take into account that its stated
share only applied to the Basic Fund and not the 3.75% fund. . . .
The Bortz survey numbers therefore do not necessarily require the
adjustment demanded by PBS. Thus, the Panel was reasonable in
adopting the [CRT's] 1989 rationale because PBS's argument, and the
design parameters of the Bortz survey, were fundamentally the same.
\193\ The Librarian identified the public television claimants
as the PBS claimants, rather than the PTV claimants as had the CARP.
---------------------------------------------------------------------------
Id. at 55668. However, for the first time in a distribution proceeding,
the door was opened to an argument that this Evidentiary Adjustment
might be appropriate in certain contexts, as the Register further
recommended:
The Panel did not state that it was using PBS's Bortz numbers as
the sole means of determining its award. In fact, the Panel awarded
PBS a share that is less than the unadjusted Bortz survey numbers.
Had the Panel stated that it was attempting to award PBS its Bortz
share, then PBS's argument might have some validity. However, since
the Panel did not, it did not act arbitrarily in denying PBS's
requested adjustment.
Id. (emphasis added).
d. The 2003 CARP Determination and the Librarian's Order
In 2003, for the first time, public television claimants, through
PTV, were successful in obtaining a ruling that supported the
application of the Evidentiary Adjustment. Specifically, a CARP adopted
PTV's argument that it was entitled to the Evidentiary Adjustment,
whereby its share of the Basic Fund was increased to offset the impact
of its non-participation in the 3.75% Fund. The CARP Report was adopted
by the Librarian, upon the recommendation of the Register. 1998-99 CARP
Report, supra note 144, at 26, n.10, adopted by the Librarian, 69 FR
3606.
The 1998-99 CARP found that, based on the evidence, PTV's ``raw
Bortz figure'' was 2.9% for both 1998 and 1999, prior to the
application of the Evidentiary Adjustment. 1998-99 CARP Report at 26
n.10. The CARP then, over JSC's opposition, bumped up this ``raw''
percentage ``to account for PTV's non-participation in the 3.75% . . .
fund[ ].'' Id. The CARP explained its rationale:
[[Page 3608]]
The Adjustment makes sense in the context of a CSO Survey where
the respondents are allocating a fixed budget among the various
claimant groups--unless JSC can demonstrate that the respondents
already understood that PTV does not participate in the 3.75% Fund.
JSC has made no such showing.
Id.
The CARP also sought to distinguish the prior rejections of this
Evidentiary Adjustment by the CRT and the 1990-92 CARP panel.
The Panel is aware that the 1989 CRT rejected this Adjustment to
Bortz and the 1990-1992 CARP adopted that rejection . . . . The
Panel believes the 1989 CRT and 1990-92 CARP did not fully
appreciate the logic supporting this Adjustment. It is precisely
because the Bortz respondents did not answer based on their actual
royalty payments and presumably did not know that PTV would not be
eligible to receive part of their budget allocation that the
Adjustment is warranted.
Id. (citation omitted) (boldface added). However, the 1998-99 CARP
Report did not make an upward adjustment to PTV's overall Basic Fund
allocation or to any measure of its relative share of the Basic Fund
other than the Bortz Survey percentage, concluding:
[W]e disagree with PTV's assertion that it is entitled to such an
Adjustment no matter which methodology is employed. . . . We view
PTV's position that the adjustment should be made for any
methodology merely as an attempt to circumvent mathematically the
legal precedents established by the CRT, and PTV has presented no
legal justification for reversing these precedents.
Id. Consistent with this limitation, the 1998-99 CARP did not apply the
Evidentiary Adjustment to the regression approach utilized by Dr.
Gregory Rosston, an economic expert who presented a regression analysis
on behalf of another party. See 1998-99 CARP Report, supra note 144, at
45-51 (discussing Rosston regression approach). However, although the
CARP did not apply the Evidentiary Adjustment, it did not explicitly
state its reasoning, nor did the CARP provide any specific rationale
for not applying the Evidentiary Adjustment to the Rosston regression
approach, other than to refer to the general discussion in that same
report.. See id. at 48 n.21 & 59 n.29 (citing p. 26 n.10).
In the end, the CARP applied the Evidentiary Adjustment by
increasing PTV's Basic Fund minimum allocation, or ``floor,'' as
derived from the Bortz Survey, from 2.9% to 3.2%. 1998-99 CARP Report,
supra note 144, at 25-26, & n.10. The final allocation to PTV though
was based on additional evidence, which led the CARP to establish PTV's
share above this floor, at 5.49125%, the same level as in the prior
proceeding. Id. at 69; see 69 FR 3606, 3610, 3616 & n.32.
The Librarian, upon the recommendation of the Register, accepted
the CARP Report in its entirety. 69 FR at 3606. However, neither the
Register nor the Librarian made any specific recommendations or
findings regarding the Evidentiary Adjustment applied by the CARP to
increase PTV's allocation floor from 2.9% to 3.2%. See 69 FR at 3616-
17[.
In the present proceeding, Program Suppliers assert that, because
the CARP set PTV's Basic Fund share above the 3.2% floor, it had not
actually applied the Evidentiary Adjustment to the Bortz Survey
results. Therefore, Program Suppliers argue that the CARP's analysis
regarding the Evidentiary Adjustment was mere dicta, rather than a
controlling endorsement of the Evidentiary Adjustment. Program
Supplier's Responding Brief at 3-4. The Judges disagree with Program
Suppliers' characterization of that ruling. The fact that PTV's
ultimate Basic Fund Share exceeded the floor does not call into
question the ruling by the CARP or the Librarian that the Evidentiary
Adjustment, in their opinion, should be applied.\194\
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\194\ However, as discussed infra, for other reasons, the Judges
do not conclude that the decisions by the CARP and the Librarian to
apply the Evidentiary Adjustment are dispositive in the present
proceeding.
---------------------------------------------------------------------------
e. The Judges' 2010 Determination
In 2010, the Judges determined the allocation of royalties for the
2004 and 2005 distribution years.\195\ See 2004-05 Distribution Order.
There, the Judges applied the Evidentiary Adjustment on behalf of PTV,
as proposed by the ``Settling Parties.'' \196\ Id. at 57070. However,
the Judges did not engage in any analysis of the Evidentiary Adjustment
(and indeed did not even describe that adjustment or identify it by
name). Rather, they simply adopted as a ``starting point'' the
augmented Bortz Survey ``which includes appropriate adjustments to the
PTV share'' and then referred to paragraph 317 of the ``Settling
Parties'' Proposed Findings of Fact. That paragraph stated: ``Because
PTV receives payments from only the Basic fund, an adjustment to the
augmented survey results is needed to produce PTV's share of the Basic
fund, as recognized by the CARP in the 1998-99 Proceeding.'' Id.
---------------------------------------------------------------------------
\195\ Congress replaced the CARP system with the Judges in 2004
(effective 2005). Copyright Royalty and Distribution Reform Act of
2004, Public Law 108-419, 118 Stat. 2341 (Nov. 30, 2004).
\196\ The ``Settling Parties'' were comprised of: JSC, CTV, PTV,
and Music Claimants. Id. at 57064.
---------------------------------------------------------------------------
In the present proceeding, PTV further notes that, in that 2010
proceeding, Professor Waldfogel asserted that his regression approach,
like the Bortz survey approach, had not differentiated between the
Basic Fund and the 3.75% Fund, thus purportedly supporting an
application of the Evidentiary Adjustment to the regression
allocations. PTV Initial Brief at 14-15. PTV further asserts that
Professor Waldfogel's testimony was consistent with Dr. Rosston's
testimony in the prior proceeding, supporting the application of the
Evidentiary Adjustment to Basic Fund allocations based on regression
analyses. Id. at 13-14. Notwithstanding that testimony, in neither of
those cases did the CARP, the Librarian, or the Judges find that the
Evidentiary Adjustment should be applied to the regression results. See
JSC Responding Brief at 7, 9.
6. The Prior Decisions Are Not Binding
The Judges do not find the foregoing findings and conclusions
sufficient to overcome the analysis they undertake in this proceeding.
First, none of the prior cases considered the dispositive statutory or
regulatory issues discussed herein. Second, the prior cases are
factually distinguishable, because neither the survey evidence nor the
regression evidence support the application of the Evidentiary
Adjustment to PTV's share of the Basic Fund. Third, as explained below,
as a matter of law, the Judges are not duty bound to apply the
Evidentiary Adjustment on behalf of PTV as it relates to the survey
evidence, notwithstanding the conclusions in the two most recent
distribution cases.
The Copyright Act does not equate relevant prior rulings with
binding legal precedent. Rather, the Act provides only that the Judges
shall ``act on the basis . . . of prior determinations and
interpretations . . . .'' 17 U.S.C. 803(a)(1) (emphasis added). As the
D.C. Circuit has explained, this provision does not mandate that the
Judges abide by specific findings in prior rulings, provided the Judges
set forth a ``reasoned explanation'' for a departure from those
findings. See Program Suppliers v. Librarian of Congress, 409 F.3d 395,
402 (D.C. Cir. 2005). In the present determination, the Judges have
explained the legal, administrative, policy, economic, and factual
reasons why an application of the Evidentiary Adjustment on behalf of
PTV is unwarranted. The two prior rulings that applied the Evidentiary
Adjustment did not address these multiple factors, and
[[Page 3609]]
certainly did not consider the issue at the depth warranted by the
supplemental briefing required in this proceeding.
Further, the prior decisions reveal that the relevant tribunals
went through an evolution, from prohibiting the application of the
Evidentiary Adjustment, to acknowledging its potential application and,
then, to supporting its application. Thus, the ``controlling'' aspect
of those prior decisions, if any, appears to be the proposition that
this thorny issue needs to be considered in detail, and that no prior
decision should be extended if the successor tribunal, through reasoned
explanation, finds good cause to render a decision different from the
one that immediately preceded it.
7. The Waiver Argument
In its Responding Brief, PTV asserts, for the first time, that
Program Suppliers, the SDC, and JSC, each ``waived'' its right to
contest the application of the Evidentiary Adjustment. PTV Responding
Brief at 21-26.\197\ PTV makes two basic arguments in support of its
theory of waiver. First, it argues that Program Suppliers, the SDC, and
JSC ``knowingly and intentionally'' did not ``submit evidence or
advance arguments'' regarding the Evidentiary Adjustment, seeking to
depart from or to distinguish the prior determinations that adopted
PTV's construction of the Evidentiary Adjustment. Id. at 21. Second,
PTV notes that none of these parties raised the issue of the
application of the Evidentiary Adjustment in closing arguments. Id. at
22. PTV acknowledges that Program Suppliers did address the issue
previously, but only in response to PTV's PCL addressing the
Evidentiary Adjustment issue. See PTV Initial Brief at 9 (citing
Program Suppliers' RPCL ] 12. Accordingly, PTV, relying on four
decisions,\198\ asserts that Program Suppliers, the SDC, and JSC waived
their arguments against the Evidentiary Adjustment.
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\197\ There is an element of irony in PTV's assertion of waiver
for the first time in its Responding Brief. By not making this legal
argument of waiver in its July 16, 2018 Initial Brief, PTV prevented
adverse parties from addressing the issue of waiver. See, e.g., U.S.
v. Layeni, 90 F.3d 514, 522 (D.C. Cir. 1996); In re Brand Name
Prescription Drugs Antitrust Litig. 186 F.3d 781, 790 (7th Cir.
1999) Although PTV might claim that it could not have been certain
it had the right to assert the waiver argument until it had reviewed
these parties' Initial Briefs, such a position would be belied by
the fact that PTV's waiver argument is based on the alleged absence
from the hearing record of adverse facts relating to facts or
arguments concerning the impact, if any, of the 3.75% Fund
allocations on the allocations of the Basic Fund. Thus, PTV appears
to have waived its waiver argument. Nonetheless, the Judges consider
and reject PTV's waiver argument on the merits.
\198\ The cases are cited at PTV's Responding Brief at 22 n.85
and discussed below.
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The Judges find PTV's waiver argument to be inapposite, given the
procedural posture of the proceeding. The Judges found the hearing
record and legal arguments to be incomplete with regard to the impact,
if any, of allocations in the 3.75% Fund on the allocations in the
Basic Fund. That deficiency extended to PTV's briefing as well as to
the briefing of the other parties. In an attempt to cure the
incompleteness, the Judges, sua sponte, entered the 3.75% Fund Order,
which specifically noted the insufficiency of the facts (``exhibits
[and] witness testimonies'') and the law (``legal arguments''), which
could be remedied by supplemental ``memoranda of law,'' as well as new
affidavits that ``clarif[ied]'' the extant record. Id. at 1. In sum,
the deficiencies in the factual presentations and legal briefings of
the parties were the bases for the Judges' ordering of supplemental
briefing.\199\ It would be anomalous for the Judges to now reverse
course and find that the arguments relevant to this issue had been
waived prior to the submission of supplemental filings, when those
deficiencies had themselves engendered the 3.75% Fund Order.
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\199\ The Judges regularly exercise discretion to seek
supplemental briefing in order to address an issue that had not been
sufficiently addressed during the hearing. A judicial order
directing the filing of supplemental papers is the preferred method
by which judges should address issues they find to have been
insufficiently considered. See United States Nat'l Bank of Oregon v.
Ind. Agents of America, 508 U.S. 439 (1991) (affirming D.C.
Circuit's sua sponte raising of unaddressed issue and ordering
supplemental briefing). Moreover, supplemental briefing provides the
parties a full and fair opportunity to address relevant issues that
were insufficiently developed and argued. Trest v. Cain, 522 U.S.
87, 92 (1997) (``We do not say that a court must always ask for
further briefing when it disposes of a case on a basis not
previously argued . . . [but] often . . . that somewhat longer (and
often fairer) way `round is the shortest way home.'') (dicta); see
also R. Offenkrantz & A. Lichter, Sua Sponte Actions in the
Appellate Courts: The ``Gorilla Rule'' Revisited, 17 J. App. Prac.
113, 120 (Spring 2016) (noting the Supreme Court's ``preference for
ordering supplemental briefing when a new issue is raised sua sponte
. . . . ''); B. Miller, Sua Sponte Appellate Rulings: When Courts
Deprive Litigants of an Opportunity to be Heard, 39 San Diego L.
Rev. 1253, 1281-82, 1297-1300 (2002) (courts more likely to raise,
sua sponte, ``questions of law,'' and ``routinely ask the parties
for supplemental briefs when deciding a new issue.''); R. Ginsburg,
The Obligation to Reason Why, U. Fla. L. Rev. 205. 214-15 (1985) (in
D.C. Circuit, if judges identify a potentially dispositive point not
raised by the parties, they generally invite supplemental briefs).
In the present case, the Judges also have wide statutory
discretion to cure deficiencies in the legal or factual record to
mitigate the harm that might otherwise necessitate a finding of
waiver. See 17 U.S.C. 801(c) (``The . . . Judges may make any
necessary procedural . . . rulings in any proceeding under this
chapter. . . . ''). The ordering of supplemental briefing is one
example of the exercise of that discretion, and its invocation
renders moot a claim that legal arguments had been waived.
The parties' supplemental briefing ultimately did not address
all of the legal reasons in the full detail that the Judges now rely
upon to conclude that they cannot bump-up PTV's share of the Basic
Fund to offset its non-participation in the 3.75% Fund. However, as
Nat'l Bank of Oregon further holds, a court can rule sua sponte even
if the parties fail to address in their supplemental briefing the
issue on which the court sought such briefing. Id. at 447. Moreover,
in that decision, the Supreme Court held that lower courts may
reframe the legal issues posed by the parties, in order to ensure
that the law is correctly applied, lest the parties force the court
to misstate the law. Nat'l Bank of Oregon at 446-47. In the same
vein, ``[a] court should apply the right body of law even if the
parties fail to cite their best cases.'' Palmer v. Bd. Of Educ., 46
F.3d 682, 684 (7th Cir. 1995 (Easterbrook, J.). Here, a fortiori,
because PTV did not make its legal waiver argument until it filed
its Responding Brief (the very tactic of which it accuses Program
Suppliers regarding the substantive Evidentiary Adjustment issue),
the adverse parties had no opportunity to cite any cases.
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The four cases PTV string cites in its responding brief,\200\ are
not on point, and do not alter the Judges' analysis. U.S. v.
Laslie,\201\ American Wildlands v. Kempthorne,\202\ and U.S. v. L.A.
Tucker Truck Lines, Inc.,\203\ all involved litigants who raised issues
for the first time during judicial review of action by a trial court or
administrative agency, and thus had engaged in an ``intentional
relinquishment of a known right,'' which is the essence of an act of
waiver. Laslie, 716 F.3d at 614. These cases are clearly
distinguishable because: (1) The arguments raised with regard to the
impact, if any, the 3.75% Fund has on allocation of the Basic Fund
relate to an issue still before the tribunal hearing the matter; (2)
the Judges have called for supplemental briefing on the very issue; and
(3) the Judges' have concluded that the issue can and should be decided
as a matter of law.
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\200\ See PTV Responding Brief at 22 n.85.
\201\ 716 F.3d 612 (D.C. Cir. 2013).
\202\ 530 F.3d 991 (D.C. Cir. 2008).
\203\ 344 U.S. 33 (1952).
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The final case cited by PTV is Intercollegiate Broadcast. Sys.,
Inc., v. Copyright Royalty Bd., 574 F.3d 748 (D.C. Cir. 2009). There,
the D.C. Circuit declined to consider an argument, raised by an
appellant for the first time ``[n]early a year after appealing the
Judges' order, and almost three months after filing its opening brief.
. . . '' Id. at 755. Although the D.C. Circuit accepted the
supplemental briefing and permitted responsive briefing, the court
expressly noted that it was allowing that briefing ``without
prejudice'' as to whether it would consider the delinquent issue on
appeal. Id. The D.C. Circuit ultimately ruled that it would not
consider the
[[Page 3610]]
issue, noting that, notwithstanding its discretionary ``power'' to
consider the delinquently briefed issue, it chose not to exercise that
discretion, in part because of the incomplete nature of the briefing
and the far-reaching consequences of the delinquently raised issue. Id.
at 755-56.
Intercollegiate is clearly not on point. To the extent the D.C.
Circuit's procedure for weighing whether to consider a delinquently
raised issue is analogous to the present case, the D.C. Circuit
emphasized that it was a matter of discretion. Likewise, the Judges
have the discretion, pursuant to 17 U.S.C. 801(c), to make procedural
rulings in furtherance of their statutory duties. The fact that the
D.C. Circuit chose in Intercollegiate to allow supplemental briefing--
without prejudice to its ultimate ruling that the delinquently asserted
issue would not be heard--in no way suggests that the Judges in this
proceeding are barred (by an assertion of waiver, or otherwise) from
exercising their statutory discretion by deciding the issue at hand,
after ordering supplemental briefing.
C. Conclusion Regarding Nonparticipation Adjustment
For the foregoing reasons, the Judges do not apply an Evidentiary
Adjustment to or otherwise adjust PTV's share of the Basic Fund to
reflect PTV's nonparticipation in the 3.75% Fund.
VIII. Conclusions and Award
As many witnesses testified in this proceeding, no one methodology
can be a perfect measure of relative market value of categories of
television programs distantly retransmitted by cable television
systems. That is inevitable, because the market value of distantly
retransmitted programs cannot be measured directly: Cable systems do
not buy retransmission rights from the program copyright owners and
cable systems do not acquire retransmission rights to broadcast
stations in marketplace transactions. In the applicable scheme, prices
are set by statute. Neither the copyright owners' valuations nor the
general laws of supply and demand apply in all their particulars in
setting prices as they would in an unregulated market. Use of different
methodologies can assist the Judges by illuminating different aspects
of the buyers' valuation.
In this proceeding, the participants, through their respective
expert witnesses, took a variety of approaches to estimate how cable
systems value programming on distant signals. Some witnesses looked to
survey evidence in which CSOs estimated relative value of programming
by category. Cable system fact witnesses also considered whether the
value of the distantly retransmitted programs is generated more by
acquisition of new subscribers or by retention of niche viewers.
A broadcast station's valuation of programming is driven by each
show's popularity among viewers: Viewership translates to advertising
income for the broadcast station. Program Suppliers advocated looking
at that viewership to determine relative value. While viewership is
important for broadcasters, the Judges conclude, based on the evidence
and arguments presented, that viewership, without more, is an
inadequate measure of relative value of different categories of
programming distantly retransmitted by cable systems. The Judges,
consistent with the past several allocation decisions, give no weight
to viewership evidence in allocating royalties among the various
program categories.
Several participants' econometricians who testified in this
proceeding analyzed value from the perspective of what CSOs actually
had done in terms of deciding which distant signals to retransmit on
their systems. The essence of their regression approaches was the same
as the fundamental correlation in the Waldfogel regression analysis in
the 2004-05 proceeding--the correlation between royalties paid and
minutes of programming in each program category on each distant signal.
As discussed, the Judges place primary reliance on Professor Crawford's
regression analysis, and rely on his duplicated minutes approach, as to
which he expressed no methodological reservations during his testimony.
After considering all the methodologies and supporting evidence
presented by the copyright owner groups, the Judges are struck by the
relative consistency of the results across the accepted
methodologies.\204\ In this proceeding, the Judges conclude that the
Horowitz Survey responses and Professor Crawford's duplicate minutes
regression analysis, adjusted to account for methodological limitations
in these approaches, are the best available measures of relative value
of the program categories.
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\204\ As noted, Dr. Israel's Cable Content Analysis, although
not a methodology that the Judges adopted, provided information on
JSC-related expenditures in a related market sufficient to lend some
support for the award of a significant share to JSC (as indicated by
the methodologies that the Judges have adopted), even though the
shares are disproportionate to the number of programming hours
retransmitted. Similarly, the McLaughlin/Blackburn ``changed
circumstances'' adjustments bolster the results of methodologies
valuing PTV programming above the lower bound set by regression
analyses.
---------------------------------------------------------------------------
The Bortz and Horowitz Surveys, together with the McLaughlin
``Augmented Bortz'' results and the Crawford and George regressions,
taking into account the confidence intervals (when available)
surrounding the point estimates, define the following ranges of
reasonable allocations for each program category in each year:
Table 18--Ranges of Reasonable Allocations
--------------------------------------------------------------------------------------------------------------------------------------------------------
2010 2011 2012 2013
-------------------------------------------------------------------------------------------------------
Min. (%) Max. (%) Min. (%) Max. (%) Min. (%) Max. (%) Min. (%) Max. (%)
--------------------------------------------------------------------------------------------------------------------------------------------------------
JSC............................................. 26.73 41.85 24.82 39.42 28.03 43.81 30.12 45.88
CTV............................................. 13.28 20.48 14.41 23.91 14.25 23.30 10.30 22.60
Program Suppliers............................... 23.88 40.15 22.10 35.70 19.56 30.90 17.27 30.94
PTV............................................. 6.70 17.46 7.90 21.21 6.10 21.61 8.30 29.39
SDC............................................. 0.48 4.20 0.33 6.64 0.25 6.31 0.23 5.20
CCG............................................. 0.01 6.55 1.12 6.61 0.70 7.47 0.38 7.85
--------------------------------------------------------------------------------------------------------------------------------------------------------
Within these ranges, the Judges use Professor Crawford's point
estimates as the starting point for most categories because the Judges
find the Crawford (duplicate minutes) analysis to be the most
persuasive methodology overall on this record. For two specific
categories, however, the Judges deviate from the Crawford analysis
based on other record
[[Page 3611]]
evidence. Specifically, the Judges make a modest upward adjustment to
Professor Crawford's allocation for the SDC category based on the
Horowitz survey results and the Augmented Bortz survey results,
together with testimony concerning the ``niche'' value of devotional
programming. Similarly, the Judges make a modest upward adjustment to
the CCG category based on Professor George's analysis and testimony
that Professor Crawford's analysis (as well as the survey evidence)
undervalues Canadian programming to a degree. The Judges adjust the
Crawford-based allocations for the remaining categories to account for
the increased allocations to the SDC and CCG categories, and to ensure
that the percentages total 100% after rounding. The resulting
allocations are:
Table 19--Basic Fund Allocations
----------------------------------------------------------------------------------------------------------------
2010 (%) 2011 (%) 2012 (%) 2013 (%)
----------------------------------------------------------------------------------------------------------------
JSC............................................. 32.9 30.2 33.9 36.1
CTV............................................. 16.8 16.8 16.2 15.3
Program Suppliers............................... 26.5 23.9 21.5 19.3
PTV............................................. 14.8 18.6 17.9 19.5
SDC............................................. 4.0 5.5 5.5 4.3
CCG............................................. 5.0 5.0 5.0 5.5
---------------------------------------------------------------
Total....................................... 100.0 100.0 100.0 100.0
----------------------------------------------------------------------------------------------------------------
As discussed in section VII, the Judges considered and rejected
PTV's arguments that the allocations of Basic Fund royalties must be
adjusted to account for PTV's non-participation in the 3.75% Fund.
Consequently, the allocations for the Basic Fund set forth in Table 1
are identical to the allocations set forth in Table 19. To arrive at
the allocations for the 3.75% Fund set forth in Table 1, the Judges
have reallocated the PTV share from Table 19 proportionally among the
categories that participate in that fund. In accordance with the
consensus view of the parties, the Judges have allocated 100% of the
funds remaining in the Syndex Fund (after distribution of the Music
Claimants' share) to Program Suppliers.
The allocations described in Table 1 at the outset of this
Determination reflect the Judges' weighing of the evidence and their
findings regarding allocation to each category of programming within
the respective ranges of reasonable allocations.
The Register of Copyrights may review the Judges' Determination for
legal error in resolving a material issue of substantive copyright law.
The Librarian shall cause the Judges' Determination, and any correction
thereto by the Register, to be published in the Federal Register no
later than the conclusion of the 60-day review period.
October 18, 2018.
So ordered.
Suzanne M. Barnett,
Chief United States Copyright Royalty Judge.
David R. Strickler,
United States Copyright Royalty Judge.
Jesse M. Feder,
United States Copyright Royalty Judge.
The Register of Copyrights closed her review of this Determination
on January 28, 2019, with no finding of legal error.
Dated: January 29, 2019.
Suzanne M. Barnett,
Chief United States Copyright Royalty Judge.
Approved by:
Carla B. Hayden,
Librarian of Congress.
[FR Doc. 2019-01544 Filed 2-11-19; 8:45 am]
BILLING CODE 1410-72-P
